Tomorrow (March 21st) marks the first day of spring. With snow falling in some cities, cherry blossoms coming to live in others, rain showers, longer days, shorter nights, and occasionally milder temperatures, we can see and smell that spring is in the air. As discussed last week, the market is also moving into its "spring" season. Triple-digit gains, triple-digit losses, inflation data, fourth quarter GDP, FOMC meetings, Alan Greenspan speeches, and multi-billion dollar deals signal a new market season beginningâand it is moving as fast as a spring shower! Traders looking for a calm and quiet market spring season will be disappointed because there's a lot of weather going on right now. Let's check out the market spring season in Europe and Asia.
The Asian markets have moved a lot this past week. In general, the Asian markets, particularly the Shanghai Index, have moved strongly upward. This was bolstered by the Bank of Japan, which decided to keep interest rates steady and reported that any interest rate changes would be gradual. Japan's Nikkei Index closed higher and the Yen closed down against the U.S. dollar. The European market season has proven more turbulent. On Monday, March 19th, the European Big Four closed strongly higher, hitting multi-week levels. Deals are the fuel behind the gains made by the four biggest markets in Europe. Dutch banking giant, [ABN]-Amro (ABN) is moving the markets around Europe. Yet Tuesday, March 20th showed the European Big Four in a negative position during mid-day trading, driven in part by profit taking from nervous investors. However, the Big Four closed in the positive after this weak opening, particularly when the U.S. futures markets began showing more strength. Following the European footsteps, the U.S. markets also closed in the positive on Monday, March 19th. Tuesday is showing small gains. The major culprit that is stalking the global markets this week is the 2-day Fed meeting after which the central bank will issue its FOMC minutes. This could continue to move the markets for the rest of the week. Other market movers coming this week are important economic reports and more deal news. It's time for spring cleaning!
Last week (beginning March 12th) was the "inflation week." The Producer Price Index [PPI] and Consumer Price Index [CPI] dominated the week and moved the markets. This week is the "Housing Week." We have three major reports due this week that will provide solid information about the state of the housing market in the United States. Two of the reports are sister reports that are simultaneously released. The third report (Existing Home Sales) is coming on Friday. We have another housing report (new home sales) coming next week, but existing home sales are the larger part of the home sales market. The housing data together with concern about the subprime mortgage lending could cause a major stir in this market.
Housing Starts & Building PermitsâMedium Market Mover
While these reports are actually two separate and distinct reports, everyone views them as sister reports. These reports measure the number of new homes being built and the number of permits for future home construction. The key word for these reports is: future. They actually report on what is planned for the future in the housing market. And the direction of the housing market usually indicates the direction of the economy. The report just came out: Housing Starts increased in February while Building Permits decreased. Most analysts believe that the housing starts report is more sensitive and reliable than the building permits report so the overall data is being received as a bullish report on the housing market.
A strong housing starts report could signal an inflationary threat, which would cause the Fed to raise interest rates. This is bearish for bond prices.
A strong housing starts report may mean the economy is healthy, strong, and robust, which is a great environment for business.
A strong housing starts report could mean a strong economy where inflation is a threat, leading to higher interest rates. This would make the dollar more attractive.
Table 1: Strong Housing Starts Report
Existing Home SalesâMedium Market Mover
This report measures the monthly sales of previously owned single-family homes. As I stated above, existing homes make up the larger part of the residential real estate sales segment. In fact, eighty percent of homes sold every month is an existing home. New home sales are also important because of the market activity around the sale of a new home such as construction. Back to the existing home sales report, it is the big kahuna of the residential sales market. Existing home sales generate an abundance of economic activity, particularly from the capital gain received by the seller. For February, the analysts predict that existing home sales have declined to 6.33 million homes. The report will be released on Friday, March 23 at 10am [EST].
Foreshadows an economic slowdown or recession, which raises bond prices.
Many businesses depend on the housing market, which could be bearishly affected by a slowdown in home sales.
An economic slowdown could cause the Fed to lower interest rates, which would make the dollar less attractive to foreign investors.
Table 2: Weak Existing Home Sales Report
Housing is a difficult subject for all but the most astute analysts. (Even they can't always get it right!) The Housing Starts Report was expected to decline, but instead showed an increase. It is difficult to predict the direction of this economy, but the economic data does help to provide a clearer picture. (I'm almost feeling sorry for the Fed members who have to make the difficult decisions about the direction of the economy!) Next week should provide more information such as about new home sales, consumer confidence, and gross domestic product. And the durable goods orders report, which is an advance report, could give us a peek into the economy that awaits us just around the corner.
The company news this week is dominated by deals and more deals. Yes, we discussed mergers in the previous Market Moves article (March 13th), but the deals just keep coming and keep growing! We have two European banks and two U.S. exchanges that are thinking of tying the knot. Although they are based in Europe and the United States, Asia is not left out of the action. Mergers in Asia are happening every day. Experts say that mergers in Asia are primarily between domestic companies, but they are consolidating, growing, and getting ready to transcend the current merger boom. This means that traders should not be surprised when Asian companies start merging with or taking over U.S. and European companies. Let's first look at the bank mergers.
The Dutch bank, ABN Amro, is in takeover talks with Barclays Bank. Barclays confirmed this information, but clarified that the talks were merely preliminary. Still, the stock of both banks jumped following the disclosure of this information. British-based Barclays stated that it may shift its headquarters to Rotterdam following the takeover. Some analysts believe that Barclays should prepare for a bidding war because other banking suitors are likely to emerge.
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Figure 1: ABN Amro Daily Chart. When the company announced its "preliminary" takeover talks with Barclays, the stock price jumped 14 percent on Monday, March 19th. However, the stock price is trading down 0.39 percent on Tuesday. Barclays is trading up 3.52 percent ($1.86) to $55.21 on Tuesday, March 20th.
CBOT Holdings, Inc. (BOT) â Intercontinental Exchange, Inc. (ICE)
Yes, we have another proposed merger of exchanges! The CBOT Holdings is the parent company of the Chicago Board of Trade. It has now confirmed takeover talks with the Atlanta-based Intercontinental Exchange. The CBOT had previously agreed to merge with CME Holdings (CME), which runs the Chicago Mercantile Exchange. That deal would have created the world's largest agricultural-commodities and financial-derivatives exchange. But Intercontinental stepped in. Intercontinental, an electronic commodities-trading platform operator, reported that it made an unsolicited bid for CBOT. The deal is valued at $10 billion. The board of CBOT has agreed to begin talks with Intercontinental. The deal is young, but exciting. And it is moving the markets.
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Figure 4: CBOT Holdings, Inc. Daily Chart. The stock price hit a strong resistance level from the 20-day moving average (blue) line. When the merger talks with ICE started, the stock price broke through this resistance level and gapped up 3.4 percent. On Tuesday, March 20th, CBOT is trading flat while ICE has gained 2.32 percent (or $2.97).
Two banks and two exchanges making deals are virtually guaranteed to move the markets! And they have not disappointed anyone. Even the Fed meetings this week cannot stop the markets from moving higher. At mid-day on Tuesday, the Dow (INDU) is up about 40 points and the [S & P] 500 (SPX) is trading up nearly 6 points. With oil trading below $57 per barrel and gold trading just above $650 per ounce, there seems to be a struggle during this new market season. But the data and deals are driving on. And they will ensure that the market spring has many traders singing in the rain.
Market Moves Wisdom of the Week
It is so exciting to find mergers and deals that are moving the markets! It is also exciting to predict the economic data and how they will affect the markets. Excitement is a big part of trading. However, a trader does not need to be on the right side of a gap to make money. Nor does she need to predict the durable goods or employment figures. To make money, a trader needs to make good solid trades, prepare for unexpected news, and keep losses to a minimum. Over the long term, these trading tactics will ensure more money is made than lost. The Market Moves Wisdom of the Week is to run the trading marathon rather than make trading sprints. Have a good, sound trading strategy and follow it. And remember that profits can be made in any market season!
Staff Writer and Trading Strategist