Daily Market Reports | Nov 06 2008
By Greg Peel
The Dow closed down 486 points or 5%, while the S&P fell 5.3% and the Nasdaq 5.5%.
On face value, it would seem like Wall Street has made its assessment of what a new, Democrat administration might mean for markets, and just what expectations of higher taxes and more intrusive government might imply. While there may be much made of the significance of Martin Luther King’s dream coming closer to reality and the hope it brings for a New America, such emotion is fleeting once the realities of the task ahead of Obama and his yet to be named team come sharply back into focus.
Last night’s weakness might also be attributed to a very poor reading on the October ISM services industry index. It fell from 50.2 (flat) in September to 44.4 (contracting), a greater fall than expected – as seems to be the norm now – and significant given the service industry makes up the bulk of the US economy. There was also a weak ADP jobs reading, but this unofficial number is rarely close to the official number which will be released on Friday night.
The truth is Wall Street did not actually react to the ISM reading – the selling started to build up later in the day. And while the extent of the landslide win to Obama may have been a surprise to some, there is little doubt Wall Street had resigned itself to a Democrat victory some time back. Obama may have brought previously indifferent citizens out of the woodwork to vote, but the market already suspected that after eight years of President Bush, an unwinnable war and a financial crisis blamed on Wall Street greed, the Democrats could have nominated a plank of wood and it would still have beaten the Republicans.
It was already pretty clear an Obama victory was nigh before the broad market S&P 500 added another 4% on election day, taking the S&P rally over the past several days to 18%. A Democrat administration might be tougher on Wall Street than a Republican one, but it’s all old news. After such a rally from the bottom it is quite normal for the market to take profits, and the bear market script is still playing out as written. The relief rally will always be punctuated by short, sharp sell-offs, and last night was one. Volume on election day was light. Volume on the election result was even lighter. There is still little conviction either way.
The same forces were at play in commodities markets last night. The US dollar fell slightly again to add to its big fall on Tuesday, but this time commodities were sold in defiance. Oil put on a very rare 10% rally on Tuesday, and was thus sold off 7% last night – down by US$5.23 to US$65.30/bbl. Gold jumped up US$40 on Tuesday, and gave back US$24.00 last night to US$739.10/oz.
Base metals have also been staging a decent comeback, so they were also sold off. Copper fell 6%, as did nickel, while zinc fell 5% and lead 3%. Aluminium was square and tin added 2%.
The Aussie dollar slipped back a cent to US$0.6866.
While consensus is still leaning towards something of a Christmas rally, volatility will remain and will be exacerbated by the administrative difficulties provided by a transition of government. George Bush is still President until the new year, albeit “lame duck” status dictates that he cannot act unilaterally. Obama remains President-elect until the new year, and as such cannot actually legislate yet. Under normal circumstances the transition period would be uneventful, but the events of the last couple of months ensure this time things are a bit different. The outgoing and incoming administrations are basically going to have to work closely in unison to prosecute all the programs hastily put in place by the Treasury to prevent the next two months being another black hole of disaster.
Obama must also choose his team, and that process is already underway. No time for hangovers. Most important to Wall Street will be the appointment of the next US Treasury secretary. Fortunately the US system of government dictates that secretaries of departments are chosen from the populace based on the experience and skills they can bring to a particular portfolio. This is different to the Westminster system, which restricts such ministerial appointments to elected members of parliament. That’s why in Australia we end up with ministers with absolutely no qualification for the job at hand, and when that becomes apparent we just rotate them like a speed-dating session.
Wall Street will thus be hanging on the announcement of Hank Paulson’s replacement. Will he/she be a free marketeer or a heavy regulation advocate? There are names already thrown up in speculation, and Wall Street is braced.
The volatility is not about to abate just yet.
The SPI Overnight fell 143 points.
