Daily Market Reports | May 23 2008
By Greg Peel
The Dow gained 24 points or 0.2% by the close last night on meagre volume. It was a tight range as the index managed to stay in the green for the session and 44 points marked the greatest gain. The S&P added 0.2% and the Nasdaq 0.7%.
The most effective catalyst for halting the slide of the previous two sessions were the volatile weekly jobs data. These numbers were once only glanced at and not given huge importance given their tendency to fluctuate from week to week. However as the US looks to the recessionary impact of potentially increasing unemployment suddenly the weekly number has taken on grave significance.
Last night economists were expecting a rise in new jobless claims but what they got was a fall by 9,000 to 365,000. While the stock market was too worried about what was going on over at the Nymex to get overly excited, the positive number was enough to turn the US dollar around after two days of sharp weakness. And a stronger dollar should affect a fall in dollar-denominated commodity prices, although this hasn’t always been the case in oil’s spectacular run up.
But this time it worked, and oil was screaming out for some sort of pullback anyway. On a day-session basis, oil fell US$2.36 to US$130.81/bbl. However, realistically the profit-takers moved in to affect more like a US$5 fall given oil had peaked over US$135/bbl in Asian zone trading yesterday. Pushing along the aftermarket had been a report suggesting the International Energy Agency was set to reduce its estimate of global supply later in the year.
Contrarians also suggested a front page story in the Wall Street Journal yesterday suggesting oil was on its way to US$200 might have been enough to ring the bell at the top of the market, at least for now. But another factor coming into consideration – to join the list of those factors that could meaningfully tip oil over – is emerging market subsidies. There are a handful of developing economies who have long been subsidising the oil price for domestic consumers, and clearly this must be hurting the government coffers. Indonesia, for one, has announced a review of its subsidy program. China is another economy in which oil is subsidised.
If the developing world begins to rein back those subsidies then the impact will be an immediate demand crunch. A higher cost of oil will also affect a slowing in current raging economic growth. It is unlikely any developing world government would scrap subsidies in one fell swoop – there’s already food riots going on around the globe, we don’t really need oil riots as well – but an easing of subsidies is another factor to consider.
The high oil price has had a material affect on US vehicle manufacturer Ford, which last night announced it was no longer anticipating a return to profitability next year. Ford is now cutting back its production of pick-up trucks and SUVs given a collapsing demand for gas-guzzlers. Ford shares fell 8%.
The bounce in the US dollar ended gold’s recovery run last night. Gold fell US$10.80 to UD$920.90/oz. The Aussie also pulled back for its dizzy heights of yesterday, losing US0.8c to be back at US$0.9559.
It was not a good night for base metals. Having teetered for the past week or so on the potential for a weaker US and global economy based on the surging price of oil, the dollar rally was enough to tip metals over last night, despite the lower oil price. It was all “systems-based” selling on the LME, meaning stops were triggered in commodity fund positions. The tip over in oil was a signal that now is the time to take money out of the commodity trade. Sessions like this feed on themselves, and when the dust settled nickel was down 8%, lead 7%, zinc 5%. Traders report a rapid withdrawal of buy-orders as soon as the advancing fund forces came over the hill in numbers, providing a vacuum for the computer-driven fund orders to sell into.
Copper and aluminium put up a good fight, and remained relatively unscathed at down 1.5% and 1% respectively.
The SPI Overnight lost 4 points.
The book-squaring in commodities could well continue into tonight’s sessions in New York and in London. Markets are closed on Monday in both centres for the US Memorial Day and a British bank holiday. Traders like to enjoy their long weekends, and find it easier to do so without outstanding risky positions.
Go you mighty Tahs!
