Daily Market Reports | Sep 04 2008
By Greg Peel
The Dow closed up 15 points or 0.1% while the S&P lost 0.2% and the Nasdaq lost 0.7%.
As Gustav fades away and Gulf oil installations begin to organise the recommencement of production Wall Street has now turned its attentions towards Friday’s employment data. In a low volume climate, and all things being relatively equal, it will probably be quiet again tonight.
The oil price continued to fall early in the session, sending crude into the 107s, but it picked back up later in the day to be down only US36c to US$109.35/bbl. Commodity prices in general followed the trend, resulting in base metals prices closing moderately higher on the LME after two days of solid falls, while gold slipped another US$5.00 to US$799.90/oz.
A rumour went around global markets yesterday Sydney-time that a big commodity fund had been hit by significant redemptions, forcing liquidation of positions to raise cash. That scenario was played out again early in New York before the panic subsided later in the day. Rumour or not, the reality is that investors in such funds usually have only a couple of brief redemption opportunity windows each year in which to withdraw their investment. One can imagine some frustrated investors who have sat and watched commodity prices tumble ahead of a window finally being opened. Such lumpy trades will likely continue in the next few months.
Which means we are likely to see commodities prices a lot lower yet, if weight of investment on the upside is any guide. Providing support for prices in the short term we have the obvious ongoing threat of more Gustavs in the month ahead, we have a proven physical demand for gold (coin and jewellery) below US$800, and we have some base metals trading at the price-of-production for low-margin producers and Johnny-come-latelies, forcing a potential reduction in supply. Nevertheless, as sure as the day is long the commodity bubble that was caused by over-enthusiastic buying in the first half of ’08 can easily translate into overly panicked selling in the second, implying the usual J-curve is on the cards.
Lower commodity prices are good news from a global inflation point of view, but as they reflect slowing global growth, the benefits of lower inflation are somewhat muted. In the US this week in particular the Nasdaq has negatively outperformed as the market comes to realise the low US dollar/strong export story is coming to a close. The US dollar ended mixed last night, but its trend is still up.
Incidental US dollar strength was underpinned yesterday in Australia as the local GDP showed only a 0.3% rise in the second quarter – slightly less than expected – and in Europe overnight where the Eurozone second quarter GDP showed a 0.2% fall. The Aussie fell well in the 82s in the local session and early New York before recovering offshore to be only slightly down at US$0.8354.
The Fed released its Beige Book last night which yet again showed anecdotal economic weakness in most regions of the US, although some regions were beginning to feel price pressures easing as commodity prices fall.
The good news about lower commodity prices ahead is it gives the smart investor a great opportunity to buy into some of the big names at a good price. Rumours of China’s impending conclusive demise are somewhat exaggerated.
The Other Sector had another mildly positive session on Wall Street last night. Shares in monoline insurer Ambac continue their recovery from near oblivion as the company shows more signs of having weathered the storm. Freddie Mac was able to sell US$4bn of bonds this week to fund its mortgage portfolio at prices slightly better than the junk status Freddie was afforded last month. Lehman Bros was again in the green as negotiations continue with a Korean Bank to take on a bankruptcy-saving stake.
And the SPI Overnight? Unch.
