Grazie Italia!! That is all that I could think of yesterday as we finally broke out of this tight trading range with a impressive rally as a result of an inconclusive election in Italy between the pre-election favorite Pier Luigi Bersani and Silvio Berlusconi. This triggered renewed concerns about Europeâ€™s sovereign debt crisis (remember that little issue??). The result was a flight to quality into US Treasuries and at one point yesterday we actually traded at 1.84%. We have come off from this low yield and are currently at 1.88%. But what the hellâ€¦it was a unexpected gift from our Italian friends as this uncertainty seemed to catch everyone off guard. Where would we be if not for the EU crisis and good old Uncle Ben!!
It is kind of funny because everything was just moving along yesterday until this development. The Dow was up a little and bonds were down a little as well. It was pretty much the same story that we had seen for a month. Then this happened and all of a sudden stocks reversed and the Dow was on its way to closing down over 200pts. Of course CNBC seemed to have every guest tell the same story about how a stock correction is in the works. Just a day after the cries for a continuation of the stock market rally made sense.
While I really want to buy into that for selfish reasons because a stock sell-off will help treasuries/mortgages, I am not ready to jump on board. I do not think the developments in Italy are grounds for a 13k Dow or a 1.60% 10yr. Like I said, in my opinion, this is a gift from Italy and my realistic hope is that we manage to spend some time in the 1.85-1.95 range while we see how the drama in Washington shakes out over the coming days/weeks. The markets will shift to the sequester storyline any minute now as we all know financial markets have the attention span of a 3yr old. At this point it appears a certainty that we are on course for the $85 billion worth of cuts on March 1st. So we will find out just how devastating these cuts will be on the economy and on our day to day lives. So between these 2 issues we should see enough of a flight-to-quality trade in Treasuries to keep rates from getting too far away from us.
So proceed with caution in this market. We caught a little break and it got the stock bulls to simmer down a little bit. However, as we saw yesterday, the sentiment can and does change on dime. The skill and perhaps the luck is to anticipate those changes.