FYI | Jul 24 2007
By Greg Peel
It was Goldilocks’ turn again on Wall Street last night as the Dow bounced back more than 120 points mid-session before drifting off at the close to finish 92 points or 0.7% up on the day. The S&P 500 followed with a 0.5% gain while the Nasdaq only managed 0.1%.
Healthcare – a sector that has been globally strong and a counter to problems in housing and financials – took centre stage, dragging the spotlight away from mortgage concerns on a day where no financial news was good news. Dow component Merck & Co soared over 6% after reporting a 12% increase in quarterly earnings. Elsewhere M&A returned to comfort the bulls with two of the world’s largest offshore drilling contractors agreeing to tie the knot, United Rentals agreeing to go private for US$4bn in cash and, across the Atlantic, Barclays upping its bid for ABN Amro in order to counter a rival.
Just like old times.
There was the usual bad news in the after-market however, as once again the theme was what looks good at first glance is not so fantastic in the detail. Texas Instruments fell 3% in late trade while Dow component American Express also fell 1.5% after the bell.
The US quarterly reporting season is now about a quarter through, and earnings appear to be reasonably strong. The difference is, however, that domestic businesses are not so great, but companies with significant offshore receipts are firing along nicely. This development reinforces the globalisation theme – one of the “platform company” (extensively examined in the FNArena Special report “Brave New World”) – and suggests that a lacklustre US economy is of little concern when the global economy is itself strong. No longer are we limited to business activities at home. Of course, a lower US dollar is assisting US-based global businesses to be competitive, a benefit businesses are not receiving in Australia at present.
And a lower US dollar also means US-denominated asset prices, such as all commodities, but importantly US stock prices as well, look good. The Dow Jones’ performance does not look so great when you measure it in another currency such as the euro.
The US dollar did regain slightly against the euro last night, which set off a small pullback in the prices of oil and precious metals. Both oil and gold have been due a healthy pullback. It was a bit of a different story in base metals however.
Nickel, which had been managing to reinstate itself somewhat after a significant correction, fell 6% in New York on news of increased stockpiles and led down aluminium (1%), copper (1.5%), lead (2%) and zinc (2.5%).
The local market held up fairly well yesterday in the face of a fall in the Dow, aided by strong commodity prices. Now we have the Dow up but all commodity prices down. The SPI Overnight is showing up 16 but we will probably have a timid start to the day ahead of the 11.30am release of the second quarter CPI result. If the core figure looks healthy, as many economists are anticipating, then we might see a boost to equities. It is quite possible the headline result will look nasty at first glance however.
