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A surprisingly strong Jobless Claims report and growing optimism about Spain will likely be the key drivers of today's market action, distracting market participants from earnings-related worries.

The market appears to be seeing a silver lining to the debt rating downgrade of Spain to one notch above the junk category in the hope that the move will force the Spanish government’s hand in asking for a bailout. It is far from clear at this stage whether this expectation will pan out, but it is nevertheless adding to market optimism on the European front.

Europe aside, we got an unusually sharp drop in weekly Jobless Claims data this morning, which will likely add to the growing optimism on the U.S. labor market front. The jobless claims report showed the big drop in initial claims to 339K, taking this key measure of unemployment to its lowest level in almost four years. The four-week average, which tends to reduce volatility in the weekly measure, dropped by 11.6K to 364K, the lowest level in six months. The Jobless Claims report adds to the strong gains in the unemployment rate in last week’s September non-farm payroll report that brought the jobless rate to less than 8% for the first time since 2009.

Offsetting these favorable reports about the domestic and European scene is the uncertain corporate earnings picture coming out of the third quarter reporting season. While the reporting season has gotten off to a weaker start relative to the previous quarter, the final tally of companies beating third quarter earnings expectations will likely be not much different from what we have been seeing in recent quarters. This is a testament to management teams’ impressive track record of under-promising and over-delivering.

But more important than what proportion of companies beat third quarter expectations will be the quality of guidance of fourth quarter and beyond, as this will determine how much earnings estimates for the coming quarters need to come down. Given what we have heard from Alcoa (AA - Analyst Report), FedEx (FDX - Analyst Report) and Nike (NKE - Analyst Report) on their earnings calls thus far and pre-announcements from the likes of Intel (INTC - Analyst Report) and Cummins (CMI - Analyst Report), the overall trend on the guidance front will likely be to the downside. We will know more in the coming days as the earnings season unfolds.

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