Dream Big

Traders have avoided getting caught up in the Chinese stock market, but can they wean themselves away from oil enough to watch fundamentals again?

Volatility returned to the stock market yesterday. The Dow closed only 52 points higher on Wednesday, which still represented a 300-plus-point rally from the morning low.

What sparked the rally?

Traders decided to take a reversal in the price of oil as a gift and ran with it.

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The bond market had a big reversal of its own. After the five-year hit a low yield of 1.13% and the 10-year 1.65%, those issues closed at 1.22% and 1.74%, respectively. It was nice to see the return of two-way action, but it was not good to see traders taking their cues from the erratic movements in oil.

After Wednesday’s big reversal, stock traders seem to want to keep the party going but are facing a few headwinds this morning. The Chinese stock market fell by more than 6% last night on weaker data, a weaker yuan, and tighter money market conditions. Oil is also slightly lower. Dow futures are up 20 points in pre-opening trading, and bond prices are close to unchanged.

So far, it’s good to see traders not get caught up in the web of the Chinese stock market. Now, if traders can wean themselves away from oil, we might have markets that watch fundamentals again. That’s probably a bridge too far, but an economist can dream can’t he?

February 25, 2016

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