Post-Election Setback To Pare Election Rally

DOLLAR RECOVERS, EUROPEAN STOCKS FADE

The pre-election rally that wasn’t really about the election (it was about fundamentals - duh) has set up to give way to a post-election downtick, after a weaker dollar and a disruption in the European market rally contribute to a weaker start Wednesday in New York.

The historic presidential triumph of Sen. Barack Obama gave equities investors what they wanted: resolution. And after just 22 months of relentless campaigning. Perhaps not the choice that equities markets would have selected, under conventional circumstances. But, if nothing else, Obama’s success promised to end the ruinous campaign of the Bush Administration, something the economy, consumers and perhaps even investors can feel good about.

But in the kind of market conditions that prevail currently, in which the erasure of one piece of uncertainty serves only to open the door to another, and potentially more debilitating problem, form has held. Investors now are worried that employment conditions have deteriorated even more dramatically than expected. That earnings have soured more distressingly than previously anticipated. That central banks’ efforts to loosen the constrictions on the credit markets still have been hit with only marginal success. And that the global equities rally, which has allowed investors here to feel more confident about trading the bottom of our market, has begun to stall.

European equities lost ground Wednesday, halting, for now, what had been a seven-day string of improved prices. A recovery by the dollar changed up the dynamic that has underpinned European stocks. The yen has moved higher, as well, promising some improvements for exporters of that nation, and allowing Asian markets to make some progress. However, futures here have shown stocks poised to a setback, wiht the S&P 500 indicating a 20-point loss, effectively wiping out nearly half Tuesday’s rise, which lifted the index above the 1000-point mark for the first time in three weeks.

Investors worried that earnings are going to continue to show some declines. The American depositary shares of miner ArcelorMittal (MT) slid 17% after posting results, and suggesting that it may have to make further capcaity cuts. The materials group rallied impressively Tuesday, helped by a downturn in the U.S. currency.

Credit market conditions continued to show some improvement. The three-month U.S. dollar overnight bank lending rates fell to just over 2.5%, the lowest rate of the year. However, the interbank lending rate remained some 150 basis points above the Fed target on overnight bank loans, suggesting that banks - rather than making loans - have been taking sums they’ve received as part of a bailout, and socked them right back into their respective central banks. Central bank deposits by European banks to the ECB reached record levels, suggesting the extent to which banks have shown reticence about lending their capital.

Meanwhile, one indicator of jobless trends with an - admittedly - suspect track record showed that job losses quickened more than expected last month. The ADP emloyement report for October showed the private sector eliminated 157,00 jobs, ahead of forecasts. When the government releases its reading Friday, the report is expected to show the tenth consecutive month of job destruction.

Source: blogs.barrons.com