Daily Market Reports | Mar 13 2008
By Greg Peel
The Dow closed down 46 points or 0.4% last night. The S&P lost 0.9% and the Nasdaq 0.5%.
It is hardly surprising that after the best day in US stock markets in five years a bit of a lull eventuated, a bit of profit-taking in the midst of a champagne hangover. However, with what appeared to be fresh buying pushing the market up yesterday along with the short-covering, the bulls would have been hoping for some follow-through. The market was buoyant early, as the Dow rallied 146 points by the late morning, but then it all ran out of puff. The Dow declined steadily towards “unch”, tried to hold it, and failed on the death – all on much lighter volume than yesterday.
The bears are saying this is just another relief rally to sell into. While the Fed move to swap prime residential mortgage-backed securities (note to ABC: that’s “prime”, not “subprime”) for US Treasuries has been hailed by all and sundry as a the most sensible action by the central bank to date, initial euphoria has given way to scepticism as to whether this is truly a turning point or just another short term prop that will prolong the ultimate agony.
From a local perspective, a previously very weak Australian market shot up close to 4% at one stage yesterday but that’s where it joy ended. Despite the Dow having gained 3.5%, the ASX 200 drifted off all day to finish up only 2.4%. The drift followed Asia, as the Nikkei only managed 1.6% and the Hang Seng 1.8%. Also worth noting is the change in the bank bill rate – the cost of wholesale funds for Australian banks. It was hoped the move by the Fed would take pressure off the the rising Libor rate, which in turn should translate into some relief in local bank bills. But the local 90-day rate managed to fall only from 8.16% to 8.14% – still 89bps over cash.
To some extent the Asian zone session reflected time allowed to sit down and think about what the Fed had achieved, and just what impact it would really have. But it soon became a snap back to reality on Wall Street last night when the latest European industrial production numbers were released. The US economy might be slowing, but at least the falling US dollar makes US exports more competitive. The European economy is expected to slow as well, given not only is Europe as deeply mired in subprime slime but the fact that the strong euro has the opposite effect on European exports. The euro is strong because the ECB rate has not been cut given inflation concerns, but last night January IP showed a rise of 0.9% – more than twice what was expected. This vindicates the ECB’s stance, and even opens the gate for Trichet to fight inflation as he wants to and actually raise the cash rate.
Result? The US dollar, which rallied strongly yesterday in the belief the Fed action might signal lesser or no further rate cuts, collapsed again last night, posting a new low against the euro (US$1.5547) and a new low in the dollar index. Despite renewed yen buying, even the Aussie rose again to US$0.9341.
Subsequent result? Oil pushed ever higher, settling up US$1.17 to US$109.92/bbl, but trading above US$110 in the after-market. When the stock markets looked once again at the falling dollar and rising oil, the steam went out of the market strength.
Which rises the question of the conundrum of dollar-oil. The US dollar fell all through 2007, first because of the current account deficit, then because of the subprime crisis and rate cuts. All the while the oil price, both through strong demand and the mathematical relationship to a falling dollar, rallied. By end last year there were calls of a US recession – not only because of the housing slump but because of high oil prices. Therein followed more rate cuts, pushing the dollar lower, which pushes oil higher, which makes a recession look more likely, which pushes the dollar lower, which pushes oil higher… Where does it end?
It might end, at least in the short term, if the Bush Administration decides its time to release more of the government’s Strategic Oil Reserve. While the SOR is there in case of supply emergencies, the government could break the rally now and buy back again at a later date. However, it has done this in the past but the effects have never lasted that long. Obviously not – we’re at new highs.
It was also back to business as usual in the gold market last night, as the precious metal jumped US$8.90 to US$981.90/oz. Over in London, base metal prices also responded to the dollar. Copper rose 1.5% while the rest of the spectrum added around 3%.
The SPI Overnight fell 24 points.
It is likely that tonight’s trade on Wall Street will be a better tone-indicator than last night’s. We’ve had the big rally followed by the breather. We’ve had time to assess. All things being equal (but bearing in mind there are retail sales, import price and inventory data to be released tonight), a return to strength could signal the initiation of a bottom-forming pattern, albeit one that will be more a medium term process than a sharp “V” event, while a weak day will be a groundhog day – more winter ahead. Then there’s the CPI on Friday, and a lot more to happen in coming episodes. One swallow doesn’t make a summer, without wishing to mix animal and seasonal metaphors.
