Trading this morning suggests that investors appear to have closed the book on a difficult September and October and may be starting to look to the future. In particular, note how volatility seems to continue to be dropping off despite a number of developments that a month ago may have sparked significant market swings. For example, over the weekend, a small regional bank in Florida failed and its deposits were quickly sold to Fifth Third (NASDAQ: FITB, Stock Forum). A month ago this news may have sent regional banks spiraling lower on concerns over who may be next, but now this appears to have been ignored by the market, which suggests that investors seem to be gaining confidence in the global banking system and that problems that may appear are being dealt with swiftly by governments.
Similarly, a lower than expected ISM Manufacturing number does not appear to have rattled markets. The October Purchasing Managers Index came in at 38.9, below the 41.0 reading expected. Considering that recent regional PMI reports had appeared weak, it seems possible that a low national figure may have already been discounted by the market.
These negative developments appear to have been offset by two positive developments. The Prices Paid component of the ISM report came in at 37.0, well below the 48.0 expected, which suggests that inflation pressures continue to ease, giving central banks room to continue cutting interest rates if needed. Also, U.S. construction spending fell by only 0.3% in September, less than the 0.8% decline widely expected.
Limited reaction to these developments suggests a number of things about the market. First, it appears that while a lot of negative news may have been discounted already, there remains significant uncertainty that may overhang equities for some time. Second, it appears that bulls and bears may be moving into balance, which suggests that markets may be moving from a period of declines (voluntary or forced) into a period of consolidation. Third, it raises the possibility that investors may be waiting to see the results of tomorrow’s U.S. election. While there may, or may not, be a move depending on who wins, what may be most important is whether a winner becomes declared as a contested result may weaken already fragile sentiment as occurred back in 2000.
Gains in a number of commodity areas, meanwhile, suggest that sentiment toward global demand conditions may be improving. Grains, led by wheat’s drive toward $5.75/bushel, have been climbing today, while copper has been climbing following a successful test of support near $1.80/lb. Precious metals have also been gaining, although silver still appears to be facing significant resistance at the $10/oz level. The energy group has been backing off today, which may be reflecting the election uncertainty in the U.S., but U.S. crude oil and natural gas still appear well supported above the $65/bbl and $6.50/mmbtu levels.
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