FYI | Oct 10 2007
By Greg Peel
Wall Street continued its extraordinary and irrational love affair with fish and chip wrapping last night as the Dow surged 120 points based on the month-old minutes of the Fed meeting which brought about the 50 point cut. The markets were largely looking for two signs – the most important being “will the Fed cut again?”, and the lesser being “what did they know that we didn’t that brought about a full 50 point cut?”.
Looking at the second question first, the answer was clearly “no more than you do”. In the case of first, the real answer is “we don’t have a clue, but we’ll keep a close eye on developments”.
Given there was no specific sentence in the minutes that said “there is no way in God’s green earth we would even contemplate another rate cut” Wall Street, which is already in a mood of all news is good news, took the ball and ran hard with it once more. The Dow closed up 120 points or 0.9% to a new high of 14,164, while the S&P rose 0.8% and the Nasdaq 0.6%.
FNArena will provide a full examination of the FOMC minutes (and what they’re worth) later this morning. In the meantime, consider that the revised jobs figure last Friday caused a complete change of heart in the Fed funds futures price. That market went from building in a better than 50% chance of another rate cut to less than a 50% chance. There was little change in the level last night. Indeed, there was little change in any of the Treasury markets either, barring a slight easing of yield following Friday’s jump (bond markets were closed on Monday). In other words, while the stock market might be excited about another rate cut, the bond market is not.
The forex market is too jittery not to discount the possibility of another rate cut however, and as such the US dollar reversed its bounce of yesterday and returned to being weak against all major currencies (including the yen). Despite yen appreciation, the Aussie bounced back to be at US90c once more. All dollar-denominated commodities which lost ground yesterday bounced back to some extent, with oil trading up US$1.24 to be back over US$80/bbl again and gold rising US$4.70 to US$737.30/oz. Base metal prices in London also steadied with nickel and zinc bouncing 2%, and lead 3%, while copper was unmoved.
Volume on the NYSE was unimpressive, leading some commentators to suggest the market has rallied into an overbought position. This is not to say the Dow should have fallen, rather than risen, on the Fed minutes release, as there was still real positive news about. Beer brewers SAB Miller and Molson Coors plan to join forces, for example. Goldminer Newmont is looking to buy smaller rival Mirimar. Aluminium giant Alcoa posted a mixed result (after market) but has announced a 25% share buyback.
More important to the immediate direction of US equities will be third quarter profit reports, and the trickle starts turning into a flood this week. Reporting takes a good month to play out. Expectations are quietly confident for a reasonable season, but stand by for some potential volatility. Still, with Wall Street convinced a rate cut will be forthcoming at the first sign of danger, it’s hard to see how this market could fall in any meaningful way this month, barring some external shock. Perhaps we will have to wait for October 31 when the Fed keeps rates on hold to finally allow the market to find its true direction – be that up or down. Certainly up is looking the flavour for the time being.
