Reasons For Today's Rally

With the ugly economic data in the morning, the market action today was paradoxical to say the least. There are probably five main arguments that can shed some light on the 3%+ rally in all major indexes, and the market being what it is, all of them are likely wrong.

• Nikkei Financial Daily: Japan government may buy stocks from market The report reflects growing concern that falling stock prices will lead to more losses among banks and other companies and put further stress on Japan's weak economy. Under the proposal, the range of assets that could be bought under an existing program also would be expanded to include exchange-traded funds, the Nikkei said. The purchases would be made through the Banks' Shareholding Purchase Corp, set up to help to revive the Japan's weakened banking sector, which was burdened by bad loans after a decade-long 1990s recession and the bursting of the tech bubble in 2002. Legislation that would allow the agency to resume stock purchases and tap a total of 20 trillion yen ($207 billion) in government guarantees has already been submitted to parliament. The agency would finance purchases by procuring funds from commercial banks and other institutions, with the government guaranteeing principal and interest payments, the Nikkei said in its report, which did not cite sources. Another proposal under consideration is the joint launch of a new stock-buying organization by the government and the private sector, the Nikkei said.
• FED Chairman Bernanke: Investors eventually will buy into US banks. Asked why anyone would buy common stock in top U.S. banks today, Bernanke replied: "Well, they wouldn't today, but I think eventually they will as all the elements of the program work together to take off bad assets, to recapitalize them, to get them restructured. ... If a bank does become insolvent then the FDIC, of course, will intervene. But we're not close to that, all the banks are above their regulatory (capital)." On buying US Treasuries–option is open. "Our objective is to improve the functioning of private credit markets so that people can borrow for all kinds of purposes. We are prepared and we want to keep the option open to buy Treasury securities, if we think that is the best way to improve the functioning or reduce interest rates in private markets. We do have a couple of other things going on at the moment, one is the purchases of agency MBS and securities and the other is the proposed expansion of the TALF. We will keep that option open, but we are looking at some other ways of addressing the private market flow."
• US Senator Levin: Goal of US autos task force is not bankruptcy. Democrat Carl Levin of Michigan met with task force members this week on the turnaround plans submitted by GM and Chrysler that include a request for $22 billion more in bailout money. Levin told reporters that the task force, led by White House and Treasury Department officials, is not excluding options, but bankruptcy "is not their goal." Separately, Democratic Sen. Debbie Stabenow, also of Michigan, said the task force is in a "fact-finding mode" and the review is methodical. Stabenow said auto suppliers, also hoping for aid, had a "very good meeting" this week with the task force.
• Dallas FED Fisher: FED would act to prevent deflation. "Deflation is as dangerous as inflation, and we will take every step to counteract it," Richard Fisher, president of the Federal Reserve Bank of Dallas, told journalists after making a speech at Bryant University in Smithfield, Rhode Island. The Dallas Fed calculates price pressures based on PCE, and in the bank's December report it found that more than 50 percent of the market basket is going down in price, Fisher said. But he cautioned that one month does not make a trend and it is not certain that this movement will continue in coming months. "There are price pressures on the downside, but we will make sure that deflation does not take hold," Fisher said. At the same time, Fisher said U.S. central bankers are keeping a watchful eye on inflation.
• Technicals: Price action sometimes determines price action more than pure fundamentals. The month end flows aggravate the problem as many see trading while others see passive reweighting. US shares have been aggressively sold down in the month – and buying back for month-end to keep a bond/equity level constant makes sense. For FX the most interesting things remain correlations. The correlation of JPY to equities is broken. Stocks up now means JPY weaker. EUR/JPY and AUD/JPY are the drivers. EUR and Gold is back in play – but some question whether its Gold/Oil as a better object to chart EUR path. EUR break of 1.2830 triggered a rush back towards 1.2880. Focus will be on EUR 1.30 overnight