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As stocks churn, financial maneuvers trump economic data

Michael Santoli
Michael Santoli

Plenty of people will tell you otherwise – and I might end up being one of them – but there won’t be a truly crucial bit of U.S. economic data released for the next few weeks.

Until the next employment report on June 5, we won’t hear much in the way of official data that should change the market’s mind about the condition of the economy or the intentions of the Federal Reserve.

So as a new week begins following a comforting jobs report and decent little stock rally Friday, these are the things to watch: Global financial machinations and how the market reconciles its own internal conflicts. On the global front, China remains the speculator’s delight. The central bank there eased money overnight and the Shanghai index (0363.HK) obliged with a 3% spurt, ending last week’s sharp pullback and bringing its year-to-date gain to 34%.

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Chinese authorities, for now, want to keep stoking an already heated stock market. Allowing companies to raise equity at attractive valuations helps ease debt burdens and the leaders want to generate a “wealth effect” among the public to support consumer spending.

At least, that’s the standard wise-guy explanation of China at the moment. And while the U.S. stock market isn’t as tightly linked to Chinese action as it once was, the market there is drawing more than its share of global animal spirits.

In the other direction, yet another Greek debt-payback deadline is near, hopes for a lasting resolution of the bailout renewal terms are dim, and it only really matters to the extent that the euro currency (EURUSD=X) responds. The euro sometimes gets stronger when Greece seems closer to a euro exit, and this was briefly the case overnight.

But let’s not keep pretending that something decisive or essential for U.S. investors will happen soon with this situation. The mood of the German bond market – which sold off dramatically last week – is the more immediate “tell,” given what it says about the fate of the crowded deflation-watch trade.

The U.S. market’s own metabolic condition has been driving a lot of this year’s action. Friday’s rally got us back to the very top of the tight three-month range. Trading types are taking heart in the spunky behavior of financial stocks, while trying to overlook laggard action in small-caps.

There’s a school of thought that says the more times an index bumps up against a level, the likelier it is to give way to an upside breakout at last. This is reasonable, and the bull case probably deserves the benefit of the doubt.

But if there were ever a market that proved the danger of trying to anticipate a market catalyst, this one is it. The fact that investors aren’t over-excited about stocks is encouraging, all else being equal. Cash has flowed steadily out of U.S. stock funds, a net positive by contrarian logic.

As MKM Partners technical analyst Jonathan Krinsky writes, “We find sentiment continues to turn bearish quickly in the down moves, and is generally not frothy on the upside.” This has been a hallmark of the current bull market. One particular pocket of the market to watch is the stock-buyback names.

Coming into this earnings season, traders were newly focused on the fact that buybacks cease during the reporting period, thanks to Goldman Sachs strategists’ noting of the trend. Indeed, the S&P Buyback Index, tracked by the ETF under ticker (SPYB), is at a four-month low relative to the broad market.

With most companies through with earnings releases, the buyback machines will soon be turned on again. Will it provide enough purchasing power to jog the index out of this tantalizing – or tedious – range? Let’s watch and see. One individual name to watch is CBRE Group (CBG), the huge manager of office buildings. Its former CEO now runs a private-equity backed firm called DTZ that is acquiring CBRE rival Cushman & Wakefield.

Commercial real estate is a classic late-cycle sector that has been gathering strength lately. Watch CBRE shares to see whether the $2 billion DTZ deal is viewed as a healthy consolidation of a strong sector, or the creation of a fresh threat to CBRE, whose shares are up 30% in the past year.

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