When a trend is underway, markets tend to respond to the news driving it. In other words, uptrends tend to go up on positive news more than then go down on setbacks. One of the biggest signs that a market trend is nearly exhausted is when it fails to respond any longer to the news that propelled it. Market reaction to news over the last 24 hours suggests that a significant trend change may be underway. Through this earnings season, some stocks have still been responding positively to strong earnings reports, such as Twitter’s 20% post-earnings rally. More broadly, however, indices failed to respond to yesterday’s stunning 4% growth in US GDP with a rally to new highs. Instead, the Dow faltered short of 17,000 and closed down on the day. Traders have, however, started to react strongly to negative news. Last night’s confirmation that Argentina has defaulted on its debt for the second time this century has sent markets in Europe and North America sharply lower with both the Dax and the Dow posting 100 point plus losses so far. This indicates that some traders are increasingly looking for reasons to head for the door. Indices have had a great run for the last several months, but now appear vulnerable. There are a number of reasons to suggest that we could see a significant 10% plus correction sometime in the coming months. 1) We are now entering August and September, historically the two weakest months of the year seasonally for stocks. Indices have had a great run but as earnings season winds down and the good results that have propelled some stocks higher dries up, stocks may fall under their own weight. 2) Companies and economies may struggle to keep up their pace of growth. Just as the street discounted the really poor Q1 GDP due to the weather impact, traders may see the strong Q2 as a one-time catchup quarter and don’t seem to think Q3 will be as strong. The latest round of strong earnings coupled with soft guidance suggests that while Q3 may continue to show growth the pace of growth may slow back to a more normal pace. 3) Strong economic growth, combined with rising inflation and increasing employment may force the Fed to start normalizing monetary policy (raise interest rates and shrink its balance sheet) sooner than previously thought. Although the Fed cut QE purchases by $10B as expected one of the hawkish FOMC members dissented, objecting to comments on the timing of when the fed may make its next move after QE3 ends in October. One of the things Fed doves have talked about is slack in the labour market, but rising employment costs released today may undercut that argument and build the hawkish case. Previous attempts by the Fed to take away the punch bowl have had a negative impact on liquidity inflated stocks. Major indices fell by over 10% within three months of the end of the QE1 and QE2 programs. 4) Political and financial risks continue to increase. In addition to Ukraine and Gaza, political turmoil has been growing in Libya again. Meanwhile, Argentina’s financial situation continues to unravel although problems in Portugal appear to be contained for now. And who knows what may be on the horizon? Today’s data show weak retail sales for Germany and Greece indicating that the Eurozone’s problems haven’t gone away completely for example. What’s interesting this time around is that capital leaving stocks and looking for a place to go has mainly been finding its way into USD. Even other traditional havens like gold, JPY and CHF haven’t been able to keep pace, which suggests a major readjustment of US monetary expectations away from full-on dovishness toward growing relative hawkishness appears to be underway. Commodities are mixed today with crude oil falling on concern about slowing demand in Europe while base metals are rallying on anticipation of improving demand from China. Results from Canadian miners were mixed overnight. Overall, resource currencies remain under pressure, particularly NZD on continued fallout from last week’s RBNZ warnings, and CAD which failed to respond to an expected improvement in Canadian GDP. Through the rest of the week, markets may remain active as traders try to figure out if the US economy has maintained its strong momentum into the summer and how much pressure the Fed may be under to move up the timetable for cutting back on stimulus. Chicago PMI later this morning followed by nonfarm payrolls and manufacturing PMI tomorrow could spark significant action across a number of markets. Corporate News Exxon Mobil $2.05 vs street $1.85 MasterCard $0.80 vs street $0.77 Mosaic $0.64 vs street $0.74 Akamai $0.58 vs street $0.55 Lam Research $1.25 vs street $1.23 Western Digital $1.85 vs street $1.74 MetLife $1.39 vs street $1.41 Allstate $1.01 vs street $0.69 Whole Foods $0.41 vs street $0.39 Kraft $0.80 vs street $0.82 Bombardier $0.10 vs street $0.09 Open Text $1.05 vs street $0.94 First Quantum $0.23 vs street $0.25, cuts dividend by 13% Barrick Gold $0.14 vs street $0.16 Agnico-Eagle $0.28 vs street $0.29 Kinross Gold $0.03 vs street $0.04 Yamana Gold $0.05 vs street $0.03 Goldcorp $0.20 vs street $0.14 Methanex $0.94 vs street $1.09 Economic News Economic reports released overnight and this morning include: US Challenger layoffs 46K vs previous 31K US jobless claims 302K vs street 300K US Employment cost index 0.7% vs street 0.5% Canada GDP 2.3% as expected vs previous 2.1% Germany retail sales 0.4% vs street 1.3% Germany unemployment change (12K) vs street (5K) Germany unemployment rate 6.7% as expected Eurozone unemployment rate 11.5% vs street 11.6% Eurozone consumer prices 0.4% vs street 0.5% Italy unemployment rate 12.3% vs street 12.6% Greece retail sales (8.5%) vs previous 3.9% UK Nationwide house prices 10 6% vs street 11.3% Australia building approvals 16.0% vs street 23.3% Singapore unemployment rate 2.0% as expected Japan housing starts (9.5%) vs street (11.5%) Economic reports due later today include: 9:45 am EDT US Chicago PMI street 63.0 10:30 am EDT US natural gas street 93 BCF Tesla Motors, LinkedIn, and many others report earnings after US exchanges close today.