IBM Deal, Merkel News, European Market Strength Helping Tired U.S. Market Recover

While many look at the U.S. stock market as the global leader, today the U.S. markets had to take a back seat to a strong performance in European shares which may have led to today’s strong U.S. stock market rebound.

U.S. markets may have been underpinned over the week-end with the announcement of IBM agreement to buy Red Hat, an open source software distributor, for around $34 billion. The move by the tech giant breathed some life into equity markets that had been deflated by worries about rising interest rates and trade disputes. The news may have served as a distraction from the negativity.

Although IBM’s shares fell 2.5 percent on the news, the reaction was normal since the buyer usually takes the hit initially. Moreover, IBM’s decision to make the aggressive move may have served notice to investors that the tech sector is alive and still kicking after this month’s steep plunge in value.

Investors will be watching the price action the next couple of days to determine if Monday’s “technical bounce” has some legs to extend the move or if it’s just a knee-jerk reaction to an unexpected positive event.

The IBM buyout of Red Hat may have stabilized prices, but it was the news that German Chancellor Angela Merkel would not seek a fifth term that fueled the solid recovery in European shares that quickly spread to the U.S. indexes. Additionally, Merkel also said she won’t stand for re-election as chair of her party in December.

The news about Merkel set the European markets on fire because she was considered by many investors to be “anti-growth”. CNBC’s Jim Cramer said it nicely today that “Merkel has been too focused on avoiding the mistakes of the past by promoting prudence and austerity.”

After a steady opening Sunday night, U.S. futures indexes rose on the back of sharp gains in European shares.

The early positive reaction to the news suggests that investors feel that a change in the political direction for Germany may result in the relaxation of spending policies while boosting the growth of large corporations in the region.

In other words, Merkel’s decision not to run for re-election is actually good for European business.

The news about IBM and Merkel comes at a time when the U.S. stock market looks tired. Investors have become complacent. Mergers and acquisitions have come to a standstill. And although the Fed says the economy is operating on all cylinders, there have been signs that perhaps things haven’t been moving along as smoothly as it perceives.

And then there is the fear of gradual yet seemingly aggressive rate hikes because the Fed is raising rates while the rest of the world is tightening more slowly. Perhaps today’s leadership by the European stock markets is the first sign that the U.S. stock markets are getting ready to pass the baton to Europe to keep the investment relay race moving forward.