When the market has confidence in the outlook, it can be a sight to behold.  When the market does not have confidence in the outlook, it can also be a sight to behold.  Yesterday, it was clear that confidence was sorely lacking.  Sure enough, the action on Wall Street was both a sight to behold and to bemoan.

The S&P 500 dropped 4.8% in a broad-based rout that spared only a handful of stocks.

Europe and ECB President Trichet garnered most of the blame for the global selloff that triggered a flight to cash and a significant flight-to-safety bid in the U.S. Treasury market where yields on the 1-month T-bill actually went negative for a brief period, indicating a willingness to pay the U.S. government to hold one's money.

In other words, yesterday's trading wasn't about pursuing a return on capital.  It was about ensuring a return of capital.

The market was weak from the onset, but the trench was dug by Trichet when he haphazardly indicated his belief in a CNBC interview that the eurozone financial situation is better than the U.S. or Japan.  Whether one agrees with his view or not, it was a statement filled with all sorts of negative connotations, ranging from fears of a liquidity crisis to thoughts of another recession.

There are a number of reports today suggesting EU leaders are busily conducting meetings to discuss how to fill the void of confidence that has manifested itself in widening credit spreads and sharply falling equity prices.

To lay all of the blame at Trichet's feet, though, is unfair.  His comments may have catalyzed the selling interest, but we feel there was a hangover effect as well from the debt ceiling mess created by our political leaders, which hasn't instilled any real confidence in market participants either.

Not surprisingly, Asian markets took their cue from U.S. trading and suffered large losses on Friday.  Most European bourses in turn opened Friday on the defensive, anxiously awaiting the release of the July employment report in the U.S.

There was a palpable sense of hesitancy in the U.S. as well in front of that report.  The S&P futures were little changed, but all of that changed when the employment report turned out better than expected and certainly better than feared.

With some whisper numbers in the negative column, nonfarm payrolls surprised in July, increasing 117,000 (Briefing.com consensus 84,000).   Similarly, nonfarm private payrolls increased 154,000 (Briefing.com consensus 100,000), reflecting the drag from government payrolls on the overall number.

Fortunately, there were upward revisions to June's data, with nonfarm payrolls reported to have increased 46,000 (from 18,000) and nonfarm private payrolls bumped up to 80,000 (from 57,000).  Granted both numbers are nothing to write home about, but the direction of the revision is what matters more after a day like yesterday.

The other good sign in the July employment report is that hourly earnings increased 0.4% (Briefing.com consensus +0.2%) after being unchanged in June.  This is a hopeful indicator for the PCE component of the Q3 GDP report.

Separately, the unemployment rate dipped to 9.1% (Briefing.com consensus 9.2%) from 9.2% while the average workweek remained unchanged at 34.3 hours (Briefing.com consensus 34.3).

The futures market popped on the headlines with a sigh of relief heard from Chicago to Melbourne.  Still, the reaction is far from a genuine sense of relief.

It is very nice to see that the headlines from the July employment report did not disappoint, but the fact remains that the pace of job growth is still not sufficient enough to produce a meaningful change in the unemployment rate.  Additionally, with the debt ceiling standoff going all the way to the eleventh hour, there is residual concern that the August employment report might not click in the same positive way.

Beyond those considerations, there is still the EU debt crisis to contend with and the idea that fiscal and/or monetary policies in major economies have shifted from being stimulative to being restrictive for growth.

The S&P futures are 1.0% above fair value, so the stage is set for a positive open.  How the market closes today, though, will be the more important consideration as participants are left to ponder the ongoing macro uncertainty over the weekend.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.