Early Look: Delayed Reaction By The Market

As the S&P 500 closed above the 200-day yesterday, I was speaking to another trader and saying that the market doesn't seem to be overly concerned with the spiking Italian yields. His answer was that the market always has a delayed reaction and then wham! Prescient comments as today it looks like investors can no longer ignore spiking Italian yields.

Bond yields in Italy have surged above 7.40% today, a level many strategists cite as the market indicating dwindling confidence with the ability of leaders to get their arms around the financial conditions in the country. Italy is far bigger than Greece, so this is a different story now.

Asian markets were actually higher overnight as China's latest CPI reading cooled to 5.5% from 6.1% last month. That led to a rally across the board in Asian markets, but the enthusiasm did not spill over into this morning's market.

On the earnings front, disappointing reaction in GM. Also PSMT (the Costco of Latin America). On the positive side is SODA, which is bucking today's weakness.

The dollar is higher as the euro is getting hit. This is weighing on most commodities. Oil prices are down near $96, while gold prices are only off slightly to $1795.

The 10-year yield has plunged back below the 2.0% level, now at 1.96%. And the VIX, after closing nicely below that 30 level yesterday, is surging +15% back to 31.65.

Trading comment: The surge in yields in Italy, and most of Europe in general, is very troubling. Italy is much bigger than the other countries involved, and the EFSF has nowhere near the firepower currently to tackle the problem itself. I have been saying that I felt portfolio managers were in dip buying mode, unless there was another shoe to drop in Europe. I'm not sure yet if this warning sign is big enough to change the equation. We will have to see how the EU officials step up their response to this latest development and if it calms the markets. Until then, continue to manage risk closely and resist the temptation to make any outsized bets.