Daily Market Reports | Aug 16 2008
By Greg Peel
The Dow rose 43 points or 0.4% while the S&P was up 0.4% and the Nasdaq down half a tad.
At the peak of the summer holiday season, Friday wrapped up a week of very light volumes on the NYSE with many clearly opting for more leisurely pursuits. Anticipation of a potentially strong sell-off in oil given options expiry proved overdone, with crude simply falling another US$1.24 to US$113.77/bbl. The fall provided for a generally positive mood on Wall Street.
The summer holiday season is also the “driving season” in the US, or at least it used to be. Analysts have been quite shocked at just how quickly the world’s greatest consumers of oil have curbed their indulgence and introduced austerity measures for energy use. Equally shocked have been the refiners, and hence last week the first signs emerged of a cut-back in production capacity. No point in producing the stuff if no one wants to buy it.
What this does mean is that the fall in the oil price may struggle a bit more from here, on its way to the magic US$100/bbl mark. The irony however is that while all about were losing their heads, it was OPEC who stuck to realities. OPEC is not normally known for its pragmatism. Having sent President Bush home red-faced once before finally agreeing to lift production slightly at the peak of the oil price crisis, in what was probably just a diplomatic gesture, the Saudis constantly maintained there would only be a need to meaningfully lift production were there a lift in demand. And there was no lift in demand. Ergo, oil is now down US$35/bbl.
A cut back in US refinery production is, however, unlikely to turn around the oil price in a hurry. Last week has delivered data indicating that all of the Japanese, German, French, Italian and Canadian economies contracted in the June quarter. The US economy did not contract in the June quarter. Isn’t the US economy meant to be the global basket case? Nevertheless, economists expect the September quarter will show contraction for the US, as well as the UK. Which quarter will be Australia’s?
On that basis it is not hard to understand why, this week in particular, the US dollar has taken off. It’s now one month since Fannie & Freddie nearly hit the wall, holding US$2.5trn of US mortgages, yet in that time the greenback is now at a six month high against the yen, seven against the euro, and thirteen against the pound. The Aussie dollar fell yet another half cent on Friday, and at US$0.8663 is at its lowest level for 2008.
The Aussie’s fall was aided by another stellar night for the greenback, driven on by a 0.4% jump in US July industrial production – the biggest gain in ten months. The New York State activity index also turned around from -4.9 to +2.8 in July. It is pretty hard for the oil price to stabilise under such dollar-surge conditions, although there’s a growing belief we may be in for a a bit of a short term correction in currencies at any moment, just as happens in any healthy market.
The US dollar failed to inflict more pain on metals prices on Friday however, and all closed relatively steady. Londoners were probably off enjoying something they call “summer” with a couple of warm pints.
There was no joy for gold though, as it posted another big fall of US$19.50 to US$786.00/oz. Technical analysts believe US$780 should hold the precious metal, which is now down around 26% from its March high. Silver is down nearly 64%. If 780 doesn’t hold gold, 750 will. It should never be forgotten that 75% of the world’s mined gold ends up as jewellery.
News from The Other Sector was mixed on Friday. Wachovia became the latest US bank to receive a letter from the SEC with regard to auction rate securities, while on the other hand Standard & Poors decided the big US monoline insurers no longer need to be on negative watch. Ambac shares jumped 24%. The financial sector ended the day slightly in the green.
Does anyone remember the VIX? This measure of stock market volatility fell below 20 on Friday. The last time it fell below 20 was at the beginning of May, when the first bear-trap rally was underway. The low in the VIX in 2008 is 16.5, the point at which the May rally ended. The peak was 37.5, on Bear Stearns day.
Bear in mind that the VIX works on measuring option demand, and in a bear market put demand is greatest. But if a bull market were to begin, call demand would strengthen, and thus the VIX would flip over as an indicator. A high VIX does not mean a falling market, it only means everyone is buying either puts (bear market) or calls (bull market) with gusto. A low VIX means those positions have been unwound.
The SPI Overnight was down 8 points.
