Daily Market Reports | Feb 08 2008
By Greg Peel
More rumours are created and perpetuated on Wall Street than in the offices of any celebrity trash-rag. Last night saw another good one, which resulted in an attempted, but finally failed, rally.
Last night the rumour went around the NYSE that the shocking ISM non-manufacturing index numbers were actually an error, and that ISM was about to come out and correct its mistake. ISM did make an announcement, but only to say the numbers were real, there would be no revisions, and please get a life. The Dow had rallied 132 points on the rumour, but fell quickly into the red in the afternoon on the facts.
Take out that anomaly and Wall Street really only banged around the flat line last night, ultimately finishing up 47 points, or 0.4%. The S&P rose 0.8% and the Nasdaq 0.6%. Not that long ago +47 would have been considered a strong day, but in the context of recent index volatility it’s as if no one much bothered to turn up to trade. Australia’s ASX 200 similarly finished down only 13 points yesterday, and those who only read the final score could be forgiven for thinking perhaps they left accidentally off a zero. We do know, however, that the Australian index dipped rapidly again before recovering yesterday.
Which might suggest we’ve once again hit a point in which the margin-call forced sellers meet the genuine bargain hunters coming back, or is it just the short-coverers? Each time we try this little exercise a good bounce is extinguished by some new bad news, and we fall once more. The bears will tell you this is classic ursine behaviour, and all rallies are presently an opportunity to sell. The bulls, at the moment, seem a bit betwixt and between.
It was a similar situation on Wall Street last night. The most important data in the session were a series of same-store sales figures for January released by various US retailers. And they were pretty bad. Wal-Mart managed a 0.5% rise, but analysts expected 1.5%. As you can buy anything from breakfast cereal to a couch at Wal-Mart, cereal held up against falling couch sales. But the likes of Macy’s, Target, JC Penney, Nordstrom, Limited Brands and Gap posted falls. There were also gains, however, and a UBS survey of 43 retailers actually netted a 0.5% increase. But the expectation was again for 1.5%, and this was January. January is the time of post-Christmas madness, bargain hunting for discounts and the spending of Christmas present vouchers. A poor January does not augur well for February and beyond.
Nevertheless, most retail names rose on Wall Street last night. This might seem counterintuitive, but it was just a reversal of the old adage. In this case it’s “sell the rumour, buy the fact”. The retail sector has been one of the most heavily sold since the R-word surfaced, and shorts like to cash in on the expected bad news.
Again this tends to throw up the idea that maybe the market has been sold down as far as it possibly could be, but every time someone makes this suggestion, to do so he has to step over the corpse of the last guy who made such a suggestion.
It was a similar story in the US dollar last night. The Bank of England surprised no one by cutting 25 basis points off its rate, taking it back to 5.25%. But all eyes were on Monsieur Trichet at the ECB. Surely he must cut this time?
Nope. Trichet stood firm at 4%. While the US dollar reacted as expected against the pound by rising, one might have expected no ECB rate cut would cause the dollar to fall against the euro. But it rose instead, given the whole world is short. The Aussie’s rather confused at the moment, so it barely moved to US$0.8926.
Trichet is still on inflation watch, which is why he wouldn’t budge. And last night the president of the Dallas Fed came out to explain why he was the only committee member to vote against the last Fed 50 point cut. He, too, is worried about inflation, and would have liked to have seen the Fed stand back after the 75 point cut just to let the system work it through. To cut too fast is to risk money-base inflation on top of existing food and energy inflation. This followed the Philly Fed president’s similar warnings made the day before. Is there a growing dissention in the Fed ranks?
If the Fed is in two minds, the bond market is not. Last night saw double digit (basis point) moves on the yield curve which sent the 10-years up to 3.7% and the 30-years up to 4.5%, while the 2-years hand around 2% in anticipation of more Fed cuts. This steepening of the yield curve has inflation fear written all over it. And if any more confirmation was needed, it came in the form of gold – once the great inflation haven – which rose US$9.00 to US$908.60/oz against a rising US dollar.
Apart from inflation concerns per se, it has to be remembered that a generic prime mortgage rate in the US is based not on the cash rate but on the 30-year rate. So while the Fed might be pumping money in at the short end to encourage banks to lend, and banks gain a benefit from lending at higher mortgage rates, the potential homebuyers themselves are going to back off because their cost is actually rising. This crisis is in the mortgage market, yet that’s not where the relief is reaching.
Nevertheless, from a fiscal point of view the Senate last night not only indicated it would pass the Bush stimulus plan, but it threw in some extra for veterans and the aged to take the total hand-out up to US170bn. Cheques will rain from the sky, as one commentator put it, but can you make Americans buy that couch?
In other news, Standard & Poors announced it had come up with 27 changes to its rating methods which would tighten its systems. Once again, it’s all well and good but the horse has had time to apply for a passport and buy air tickets. And the gate may not be fully shut anyway, as S&P was a bit vague on whether under the new rules the CDO debacle could have been prevented. It wouldn’t want to say so really, as it is about to be hit with a legal tsunami.
Oil turned around and went back up last night, rising US97c to US$88.11/bbl, largely due to unscheduled production cuts in the North Sea and Nigeria. The rally was undermined, however, by the retail sales figures and ongoing R-word fears.
The base metal market was relatively quiet with the glaring exception of copper. Copper inventories fell for the first time in three months, catching the market short, and sending the price up through technical stop-losses. Copper put on some 5%.
The SPI Overnight rose 28 points.
And the last word on inflation today is an acknowledgement that wheat has hit an all-time high.
