A rally in the face of weak economic data picked up steam all day on Thursday as stocks to snapped a five-day losing streak. In many ways Thursday would have been the perfect way to close the 3rd quarter of 2012; a year characterized by markets all but impervious to an economy that is stagnant, at best. With stocks up double-digits going into the start of Q4 on Monday the tension is high on the Street. This morning's latest reading on Chicago PMI confirms that sentiment.
"Fundamentals in terms of the economy remain weak," says Adam Parker, chief U.S. equities strategist at Morgan Stanley. "What helped people feel more optimistic [this year] was removal of some of the real tail risk events that began to surface last year."
He believes investors have had a false sense of optimism that Europe will work itself out, the economy will improve, and fiscal policy gridlock will break. This complacency is ready to snap and the stability of Europe could be that breaking point. To Parker and the Morgan Stanley team, the first signs of market stress will be seen in currencies.
"A key debate will be the Dollar/Euro relationship," says Parker. "For every 1% the Dollar strengthens against the Euro, it's 60 basis points out of U.S. S&P earnings —so a 10% move Dollar/Euro is going to hurt earnings 6%. It's a big deal."Read More »from Market’s Next Double-Digit Move Is Down Says Parker