Economic data, earnings and speeches to test new bullish sentiment

Good morning,

• Markets rally after monumental effort on Thursday;

• S&P looking more bullish after 10% correction;

• Economic data, earnings and speeches to test new bullish sentiment;

• Yellen speech could stir things up again in the markets.

Equity markets are finally back in the green on Friday, following more than a week of extreme negativity that saw the S&P come very close to a 10% drop from its record highs reached in September.

It took a monumental effort to turn things round though which says a lot about just how bad things had got. In the space of a few hours the ECB announced the reduction of haircuts on Greek debt, Fed officials talked up the potential for more quantitative easing and jobless claims fell to a 14 year low, while a number of other economic releases also exceeded expectations. Even after all this, indices only managed to erase losses and end the session pretty much flat on the day.

Things have got off to a more positive start today though, with European indices currently posting around 2% gains, while US futures are around 1% higher. If there’s one thing we’ve learned over the last week though, things can turn around rapidly so it’s far too early to suggest with any real confidence that this sell-off has ground to a halt.

That said, it’s been clear over the last few days that investors were being tempted into becoming buyers again. On Tuesday, the Dow and the S&P closed near their opening levels, suggesting a cooling in selling pressure, while on Wednesday, markets rallied into the close which is quite a bullish signal. Given that this rally occurred after the S&P had fallen 9.9% from its highs, extremely close to the 10% correction so many had called for, it may suggest that investors are happier with these levels. The fact that we didn’t see indices break below Wednesday’s lows is also quite a bullish technical signal in my opinion.

The real test will be how the market now responds to negative news, such as a disappointing economic release, poor earnings or a slightly hawkish comment from a Fed official. Well, all of these will be tested today. Ahead of the open, we’ll get some housing data for September, with housing starts and building permits numbers being released. Both are expected to rise slightly compared to August which could provide a boost, especially following yesterday’s disappointing NAHB housing market index number. We’ll also get the preliminary UoM consumer sentiment reading for October, which is expected to fall to 84.1 from 84.6. The consumer is very important to the US so this is always worth watching out for, especially at a time when the market is so sensitive.

Janet Yellen is due to speak today which cause a stir in the markets. The Dow rallied 150 points in the space of a few minutes yesterday after James Bullard suggested that the end of QE could be delayed and even increased. Bullard isn’t a voting member of the Fed so you can only imagine what would happen if we got similar admissions from Yellen today.

The S&P is currently expected to open 19 points higher, the Dow 172 points higher and the Nasdaq 40 points higher.