Is It All About The Yen?

If you haven't noticed lately, our market seem to be the most highly correlated to moves in the Japanese Yen.  Yesterday markets were down sharply and then when some news came out that caused the Yen to weaken, stocks immediately bounced.

This notion goes to the "carry trade", which we won't delve into today, but basically a lot of global money is invested predicated on the Yen remaining weak.  Anytime the Yen starts to rally it spooks global investors who selloff risk assets (like stocks) in response.

Over the last week a stronger yen has pressured stock markets, but yesterday news broke that Japan may be set to downgrade its economic assessment of its economy.  This would likely result in more stimulus and a weaker yen.  And like clockwork, stocks rallied.

This morning the yen is lower and our stock market is higher.  We are not saying it is the only variable moving markets these days, but the inverse correlation is certainly one to pay attention.

In terms of China, their Q1 GDP figures out last night showed their economy grew 7.4%.  This is slightly above consensus estimates, but still starting to fall below the longer-term 7.5% target for the government.

Turning to the US, there was another handful of earnings reports last night as earnings season heats up.

Stocks rising on earnings: YHOO, INTC, IBKR, GWW, ABT, PNC

Stocks falling on earnings: BAC, CSX, LLTC, FRC, USB, STJ

Trading comment: The stock market is bouncing for a third day, but most of the major indexes remain below their 50-day averages.  We have said repeatedly that corrections don't come in a straight line.  So the type of bounce we are seeing is normal.  But that doesn't mean we should be lulled into a sense of complacency.  Given how long the last runup has been, it is unlikely that this recent pullback has run its full course.  We still expect more choppiness to downside action ahead and are maintaining our defensive posture for the time being.