Daily Market Reports | Jul 04 2008
By Greg Peel
In a half-day holiday session, the Dow rose 73 points or 0.7% while the S&P could manage only 0.1% and the Nasdaq fell 0.3%. Volume, as one might expect, was very light.
All eyes were focused on Europe last night as the European Central Bank announced its rate decision. The decision itself was no longer so important – the market had already “baked in” a 25 point hike and the US dollar had been falling all week to accommodate that expectation. What was important was the accompanying statement. Were Jean-Claude Trichet to use his favourite phrases of ongoing “heightened alertness” or “strong vigilance” on inflation, the signs would be that more hikes were to come, and the US dollar would have tanked.
What Trichet said, however, was “Starting from here, I have no bias”. Here being 4.25% – a 25 point hike.
Which puts to bed any idea of a series of rate cuts coming from the ECB, nor indeed another hike anytime soon. This news sent the US dollar on a run, mostly bringing it back to the point it started before everyone began assuming a 25 point hike in the first place.
The most immediate effect of the jump in the US dollar was a rout in metal prices. On the LME, copper reversed its 3% gain of yesterday and aluminium did the same for 1.5%. Elsewhere there was carnage, as lead fell over 8% and zinc 6% while nickel lost another 2%.
Gold fell US$10.90 to US$934.20/oz, while the Aussie slipped only slightly to US$0.9600.
But the one commodity everyone is looking to fall on a stronger greenback did not. Oil rose by yet another US$1.72 to US$145.29/bbl. It did not quite reach US$150 for the July 4 weekend, as Morgan Stanley predicted, but US$150 still looks on the cards. Apart from this week’s inventory numbers which showed a fall in crude levels, the war of words continues in the Middle East as Iran responded to threats last night by suggesting it would not take any Israeli attack lying down.
If the US, and more importantly Israel, can exhibit some patience, they will notice that Iranian president Ahmadinejad is beginning to fall out of favour with his people. The hardliner came to power at a time when Iran had been becoming one of the more liberal Islamic nations, and has done nothing but rant and rave ever since, particularly advocating the destruction of Israel. By persisting with a suspicious nuclear program, Ahmadinejad has brought economic sanctions upon his people – people who would probably just rather get on with their lives.
Geopolitics aside, the other problem still spooking the oil market is we are now entering the hurricane season in the Gulf, and a second tropical storm has formed. Not every storm has to become a hurricane, but it would be an unusual season if it passed without at least some temporary shutdown of Gulf oil drilling. On the demand side however, it will be interesting to see how the US “summer driving season” plays out. The July 4 weekend is a peak of this season.
The other big event of last night was the US jobs report for June. Economists were expecting a fall in jobs of around 40,000 but also a slight pullback from the big unemployment rate jump to 5.5% last month, which was put down to the seasonal effect of school and university leavers. The number came out at -minus 62,000, and the unemployment rate remained at 5.5%. The April and May figures were also revised lower.
This was not good, but then it wasn’t really all that bad either, as far as Wall Street was concerned. There were fears things could be a lot worse. So the jobs number was largely shrugged off, as was the ISM services sector index for June. Economists had not expected this figure to fall from 51.7 in May to below the 50 mark – which indicates contraction – but it fell to 48.2. This is the lowest level since the beginning of the year. Nevertheless, economists believe they are currently looking at a flat US economy, rather than a particularly recessive one.
So the Dow managed a rally, although it wasn’t exactly convincing. The S&P managed only to stave off a break-down through support. We will have to wait until next week when many traders return from their long weekend to see what the market really thinks.
There was some good after-market news. The Fed announced that the US$29bn portfolio of securities it took from JP Morgan in exchange for Treasuries – as a loan in the Bear Stearns rescue – had not reduced in value since March. Analysts had been expecting the Fed to join the rush to write down valuations just like every bank and broker has been doing lately. So whether this news be realistic or not, it should provide comfort for financial stocks on Monday, providing nothing untoward happens in between.
After the coal-driven collapse to under 5000 in the ASX200 yesterday, the SPI Overnight rallied 14 points. The September SPI ended yesterday’s session smack on 5000. For the time being, perhaps 5000 might hold, but for Wall Street to post any meaningful rally, the oil price will have to correct.
There is a holiday in New York tonight. Barring any extreme developments elsewhere, there will be no Overnight Report tomorrow. (Ah – to sleep, perchance to dream).
