Daily Market Reports | Jun 20 2008
By Greg Peel
The Dow rose 34 points or 0.3% while the S&P added 0.4% and the Nasdaq shot up 1.3%.
The impetus for the big move in the Nasdaq was quite simply the oil price, which spent the day falling and ultimately closed down US$4.75 to US$131.93/bbl. As an index laden with gizmo sellers and internet retailers, the Nasdaq is a direct recipient of consumer spending power, which is clearly not helped by a higher oil price.
But in the words of Monica Lewinsky, one swallow does not a summer make, and the sharp move in the oil price is just the latest shift in a volatile market. The basis for oil’s fall does have substance as the Chinese government acts to curb growing fuel demand which is feeding into global inflation, and sending Chinese inflation over 8%.
China has been heavily subsidising the cost of fuel to its citizens as a means of supporting the country’s rapid economic growth. China can do this, because it is swimming in foreign exchange reserves. But it has now dawned that these subsidies are more of a problem than a solution, and so effective immediately the cost of gasoline in China will rise 17%, diesel 18% and jet fuel 25%. Growing Chinese demand is seen as the the counter to the speculation argument, so at least one part of the equation is being addressed. The other big event in oil will be this weekend’s meeting of OPEC ministers in Jeddah, from which it is anticipated a further increase in Saudi oil production might be forthcoming. However, wise traders are sceptical about whether (a) OPEC will really do what it says it will do and (b) whether increased production of Saudi Arabia’s tired, old, bottom-of-the-well, heavy sour crude is really going to impact on a market needing light sweet crude for gasoline production in the US driving season (read: summer).
A $5 drop in the oil price should have provided a bit more of a fillip for the broader market, but unfortunately there’s a lot more going on than just the oil price. Arthur and Martha were back trading on the floor of the NYSE last night, and they just kept running backwards and forwards across the Dow 12,000 level as new bits of information came to hand.
On the negative side, economists had been expecting a tick up in the Philadelphia Fed index of economic activity to a minus 12 reading from May’s minus 15.6, but instead the June index came out at minus 17.1. Factories in the region have experienced a fall in demand for the seventh month in a row and the prices-paid index is now at its highest level in real terms since 1980 – the year of the last great oil shock.
The May leading economic indicators measure – a predictor of economic health 3-6 months hence – showed its second consecutive monthly rise of 0.1% for May, which hints that perhaps the US economy is turning the corner. Stimulus cheques?
On the banking front, Citigroup added misery to depression by making good on Goldman Sachs’ prediction from Monday. The CFO warned that Citi’s second quarter result could include more “substantial” write downs of subprime mortgages, leveraged buyout loans and other assets. While some individual financial stocks are already trading below their March lows, this news sent the XLF banking sector index below its March low for the first time.
And as Citi was breaking the bad news, television pictures showed two former Bear Stearns fund managers being led away in handcuffs. The apparent crime of these two managers of those two Bear Stearns funds which started this whole mess was to mislead investors into believing everything was rosy when it wasn’t. This is fraud, say the authorities, which carries a maximum 20-year jail term. Ironically, every investment bank including Citi, Lehman et al has been doing exactly the same thing since last July. Where are the rest of the handcuffs? Arthur Miller would think it all hysterical.
As it was Thursday, it was weekly jobless claims day, so once again the market was braced. But then it wasn’t quite sure what to do with a fall of 5,000 to 381,000. And the monthly average actually rose by 3,250 to 375,250.
Then as all was looking mostly gloomy attention swung to another regional bank. The regionals have been hammered mercilessly lately as the ripples from the rock dropped in the credit market pond continue to radiate, but in this case a regional came out and announced – hold the presses – that it would be increasing its cash dividend. No, this is not a misprint – they definitely said “increase”.
The response was short and sharp as suddenly short covering took hold across the financial stocks. The Dow made it all the way up to +85 on this move, but like most short-covering rallies the momentum soon slowed. The Dow fell back to be up only 34 for the day.
The US dollar had a mixed day as well, mostly rising against the majors. However gold defied the odds and added another US$3.20 to US$897.20/oz while the Aussie just kept rising to US$0.9511. Must be that yen selling coming back.
It was mostly a bad day for base metals, as the cut in Chinese fuel subsidies does little to spur on demand for anything else. Lead, nickel and zinc all fell 3-4%. Copper had opened strongly, but the announcement of a resolution in the Peruvian miners’ strike saw the red metal fall back to where it started. Aluminium remained steady.
The SPI Overnight was up 27 points. The June contract closed out yesterday without too much influence on a market that was just plain weak anyway, and we are now trading September. What might September bring?
