Daily Market Reports | Sep 03 2008
By Greg Peel
The Dow closed down 26 points or 0.2% while the S&P lost 0.4% and the Nasdaq 0.8%. Before 10am the Dow had shot up 247 points, but then began a drift-off for the rest of the session.
The impetus for the early rally in the Dow was quite simply the oil price. While the US enjoyed the Labour Day holiday on Monday the oil market in London was already showing a steep fall. As Tuesday dawned it was clear Hurricane Gustav had not proven nearly as devastating as was feared, leaving oil drilling and refining infrastructure sodden but undamaged. The oil price had been in a downward trend when Gustav reared his ugly head, causing the price to hold up. As the storm abated the downward trend continued, sending the oil price in New York US$5.75 lower since Friday to US$109.71/bbl, breaching the important US$110 support level.
Such a drop in the oil price should be an impetus for the stock market given it puts more money back into the pockets of consumers. And so it was the Dow took off. But to understand why the rally failed one need only look to Ross Gittins’ headline in today’s Fairfax press: “Yippee, the bad times are back”.
Gittins is referring, tongue in cheek, to the fact that while all of Australia has been excited and relieved by the first RBA interest rate cut in seven years, the reality is that the cut has only occurred because the Australian economy has gone into a steep dive. Is this really something to be happy about? Australia’s rate cut was not lost on the Americans, as it is representative of the realities of the economic story beyond the US shores. The world economy is slowing, and that is what is causing oil demand to fall and thus the oil price to fall. The only saving grace for the US economy since the credit crunch began has been that a lower US dollar has meant surging export sales. But now that the rest of the world is slowing, and the US dollar is subsequently rising on a relative basis, that export bonanza may prove short lived.
This is the reality of the stronger US dollar. It is only strong because everyone else is weak. The Aussie dollar has fallen another US1.25c over the last 24 hours, to US$0.8382, in response to yesterday’s much anticipated cut from the RBA. The Aussie had already fallen US13c from its highs before the RBA confirmed the move, but with more rate cuts anticipated the Aussie is in freefall. And it’s all about a slowing Australian domestic economy combined with a slowing global demand for Australia’s primary exports.
This is the reality that greeted Wall Street by 10am. While a lower oil price is good in the micro, domestic picture, it is actually a weak indicator in the macro, global picture. World equities are currently in a bear market phase and the nature of bear markets is that rallies are to be sold into. There was also little return to conviction despite the official end of the US summer break, with trading volumes remaining at historical lows. The buyers met little resistance initially before the sellers moved in to restore order.
Sectorally the market was split based on the implications of the lower oil price. Financial stocks trod water, retailers enjoyed a good day, but the energy and material sectors copped the brunt.
In London on Monday night there were more falls in base metals, with copper dropping 2% and nickel 5%. Last night nickel held up but copper lost another 1%. Over two nights the gold price has fallen nearly US$25, down another US$12.10 last night to US$804.90/oz. The US dollar was strong across the board – not just against the Aussie. Rate cuts are now also anticipated in Europe and the UK soon, and maybe even in Japan.
The oil price is now eying off the US$100 mark – the level which many a commentator has stated it cannot go below. But then many a commentator also said it could not go below US$110, or even US$120. (With the exception of FNArena, which has long suggested at least US$90 could be tested). We have not, however, necessarily seen the last of the season’s hurricanes in the Gulf and hence there may be oil price rallies ahead in September. But Gustav has shown that any shutdown in oil production in the Gulf can only be viewed as a temporary phenomenon, and that the oil price has not otherwise found a bottom just yet.
The SPI Overnight was down 31 points.
