Daily Market Reports | Aug 22 2008
By Greg Peel
The Dow closed up 12 points or 0.1% while the S&P added 0.3% and the Nasdaq lost 0.3%.
The world is coming to believe that Russian-muscle flexing in Georgia has as much to do with a wider reassertion of power than just a local ethnic skirmish. Russia continues to play games with NATO as it sets deadlines for a withdrawal from Georgia and then fails to keep them. In the meantime, Russia is stringently opposed to US plans to build a missile defence system in Poland. How might the old foe create some leverage?
Russia is the second largest exporter of oil in the world after Saudi Arabia. All of Europe depends on supplies of Russian oil and gas. There we were keeping a wary eye over the Middle East, never considering the possibility that the next oil supply shock might come from further north.
The two wildcards in oil price story have always been geopolitical tension and hurricanes. We know in the latter case that Katrina prompted the US government to release strategic reserves of oil, thus correcting the oil price rally of late 2005. One might presume this would occur again. But the former case is a bit more problematic.
The oil price has fallen a long way, and after some consolidation in a tight range around US$115 it was always on the cards that a snap-back rally would occur to take us back to US$120 or even US$125 before the downward trend reasserted. Last night oil shot up US$5.62 to US$121.18/bbl.
Russia was part of the impetus, but so too was the US dollar. After having had a solid run of late, the US has been wavering more recently as uncertainty continues to surround the US financial sector, particularly Fannie and Freddie. It has now come to be reasonably accepted that F’n’F cannot go on, and that the government will indeed take over. While this will cost the taxpayer, and undermine the dollar, the resultant stability such a move would engender should actually be dollar positive.
But then last night Ben Bernanke made a regular testimony to the Senate Banking Committee, and observers noted that the Fed chairman’s July call that downside risks to the US economy had diminished somewhat had now become “significant downside risks”. Bernanke declared that growth in the second half would be “well below trend”.
So it was goodnight to the greenback last night, and all commodity prices responded accordingly, including oil. Bear in mind that the market has been getting itself short. The 5% jump in the oil price was matched with a 3% jump in gold – US$23.80 to US$836.10/oz – a 3% jump in aluminium, 4.5% in copper, 7% in both nickel and zinc and 8% in lead.
The Aussie jumped three-quarters of a cent to US$0.8809.
While such moves were obviously a positive for the oil, materials and gold sectors on Wall Street, one might have otherwise expected the broader index to tank. It has all year when the oil price has shot up.
One reason why it didn’t tank is because traders were wary of the jump in oil as being merely a long needed snap-back on short covering. In other words, this is not a trend reversal. The other reason is that the financial sector opened weak but came back to almost square in the end.
While Fannie and Freddie were relatively stable on the belief their fate is sealed, the rumours began for Lehman Bros last night – the sort of rumours that usually signal the beginning of the end.
The Wall Street Journal reported that Credit Suisse had pulled its line of credit from Lehman, and that the Fed was investigating. This was later denied. The thing about rumours is it doesn’t matter whether they really are true or false. It is also well known that Lehman has been trying to sell of its investment management business – apparently to the Chinese or Koreans – and it appears no deal is forthcoming.
But just when it was looking bleak for Lehman, one analyst released a report upgrading the stock to Buy. He declared that Lehman would not go down, but would be swallowed in a hostile takeover. Faith restored, the shares rose to close only marginally down on the day, and the rest of the financial sector followed suit.
So with all of the above to absorb, the Dow finished the day square.
The SPI Overnight rose 31 points. 5000 anyone? Here we go again. (BHP and Rio up 3% offshore).
