Daily Market Reports | Aug 15 2008
By Greg Peel
The Dow rose 82 points or 0.7% while the S&P was up 0.6% and the Nasdaq 1%.
Inflation was the talk of Wall Street last night following the release of the July CPI. The 0.8% jump in the headline was fully twice what economists had expected, and the annualised rate of 5.6% is the highest since 1991. The core rate (ex food & energy) rose 0.3% against a 0.2% expectation, for an annualised rate of 2.5%.
The difference between the headline and core rates tells the story, and also explains why Wall Street dismissed last night’s numbers as being yesterday’s news. Oil and food prices were still soaring at the consumer level in July given the peak in spot prices occurred one week into the month. As Australian drivers and shoppers will have noticed to their chagrin as well, the price at the pump or the price on the shelf does not follow down the spot price immediately.
(Unfortunately for Aussie drivers, the Aussie dollar is now spoiling the party. The Aussie was down again last night to US$0.8720.)
So when looking at July’s US CPI, do we consider the peak is now passed and all will be well ahead, or do we see the big jump as evidence that despite falling commodity prices, inflation will linger?
The correct answer is that both are likely true, but Wall Street was happy to shrug and get on with it last night. Traders also shrugged off news that US real wages were down 3.1% annualised in July, and that a slight fall in weekly jobless claims was not as big a fall as anticipated. Oh, and the official measure of the median house price fell 7.6% annualised in July, but we’re all used to that one by now. Besides, a more poignant reality is provided by the Case-Shiller 20-city index which is down 16%.
The impetus for indifference to the economic data came from the oil price, which fell almost a dollar to US$115.01/bbl. The reason? Well, Wednesday provided a “what were we thinking?” rally and Thursday dawned over a slumping global economy.
Tonight’s trade will be interesting, as options on the Nymex futures contracts expire. (Nymex futures are the benchmark for West Texas Intermediate as physical spot prices vary depending on delivery location.) There are some very big put positions still open at US$100, US$110 and at US$115. The implication here is that there might thus be some selling pressure.
Oil’s fall was assisted by a big surge in the US dollar, which was precipitated initially by the CPI number and some more weak economic data out of Europe. But probably the biggest influence on the dollar last night was a report issued by Goldman Sachs. Goldmans analysts are now bullish the greenback. The significance of this report is only apparent when you appreciate that Goldmans has been bearish the greenback – correctly – for ten years.
So unfortunately it was back to reality for gold. There’s nothing worse than a tease, and Wednesday’s trading was just that. Gold fell US$20.90 to US$805.50/oz last night.
The base metal relief rally also proved short lived, as all metals bar tin fell 1-2% in London. Most of the action is the US dollar et al occurred after London had closed, so BHP and Rio prices in London both finished strongly as LSE traders caught up to Australia’s ridiculous rallies yesterday (just how short did everyone get?), which were catching up to the London rallies on Wednesday. BHP closed weaker in New York.
And the only other sector in the Australian market will be pleased with last night’s bargain hunting in US financial stocks following a couple of days of solid weakness. The XLF financial sector index was up 3%.
The SPI Overnight was up 20 points.
Don’t forget to tune in to Sky Business tomorrow morning at 9am to see Rudi strut his stuff. I always get a laugh out of it 😉
