Daily Market Reports | Mar 20 2009
By Greg Peel
The Dow fell 85 points or 1.1% while the S&P lost 1.3% and the Nasdaq 0.5%.
Last night’s drop on Wall Street cancelled out Wednesday’s rally and featured profit taking in those sectors which have been off to the races since the market bottomed over a week ago – financials, home builders and property trusts in particular. However it was a mixed bag of movements within the indices last night.
The shares of automakers, auto parts makers and auto financing companies soared last night as the Fed wasted no time in beginning to implement its expanded Term Asset Loan Facility (TALF). The first announcement was a US$5bn injection into the auto loan market. Given 80% of Americans buy cars on finance, the injection was well received. General Motors was up 9%.
The irony is that US$5bn seems like shrapnel compared to the now US$13 trillion (try and contemplate that amount of money) the US government and central bank have conjured up to pump into an ailing US economy since the subprime crisis began. The latest trillion includes US$300bn which will be printed by the Treasury and given to the Fed so the Fed can lend it back to the Treasury to fund the money it has printed, and hence attempt to unfreeze credit markets that have not thawed for eighteen months despite a now zero cash rate.
The first reaction to this announcement came in Wednesday’s session when the US dollar index dropped 3% on the news. As traders across the globe absorbed the implications of this quantitative easing, the dollar was sold down another 1.8% overnight. The result of a falling greenback was to send commodity prices rocketing.
Oil jumped 6% or US$2.83 to US$50.97/bbl to mark its highest close in 2009. The April delivery contract expires tonight so the greater volume is now in the May contract, which last night closed at US$52.90/bbl. This was a dollar trade pure and simple.
Base metals in London also surged. Nickel rose 1%, lead and zinc 2%, copper and tin 4% and aluminium an astounding 5%.
The surge in metal prices belies an ongoing wane in global demand. Copper has been throwing up a smokescreen recently as the Chinese take a low price opportunity to restock after having wound down inventories of previously expensive metal. This is warehousing and nothing less. Chinese exports fell 27% year-on-year in February. While LME copper inventories have been falling as a result, last night it was announced aluminium inventories had reached yet another all-time record. Yet the aluminium price surged.
The sudden collapse of the US dollar, brought about by the Fed’s quantitative easing, has sparked a short-covering rally in commodities. This is purely and simply inflation, for demand is not growing. Last night shares in Alcoa jumped 17%. The materials and energy sectors provide positive movements to offset weak movements elsewhere. Sectors negatively leveraged to the oil price, such as airlines and consumer discretionary, took a dive.
What we are seeing is profit-taking in an overbought US dollar (or call it short-covering in the euro and other currencies), short covering in commodities, and ultimately short-covering in stocks. The US stock market had rallied 20% by Wednesday (the Australian market has managed only 10%). These movements could well continue, with a falling US dollar as a source. However what happens next will depend on how quickly the market can rebalance. At the end of the day, the UK, Europe and Japan are also suffering from very weak economies. Whose is worse? Who has spent too much in reflation attempts? And will the end of the quarter this month unleash another round of redemption selling in the next six-month window?
The Philadelphia Fed last night released its monthly report on what is seen as a bellwether industrial area of the US. New orders dropped to their lowest level since 1980 and inventories and employment reached record lows. That’s a snapshot of the present. Looking forward, the Conference Board index of leading economic indicators for February showed a 0.4% drop. Such indicators attempt to project into the next quarter.
The effect of the falling greenback and inflation fears again sent gold running. Gold added another US$14.90 to US$958.60/oz. The Aussie jumped yet another 0.8 US cents to US$0.6860.
Australian exporters who have seen demand collapse but enjoyed somewhat of an earnings buffer from a weaker Aussie are now facing the possibility of the Aussie rising again without any concurrent rise in commodity demand.
The SPI Overnight was up 13 points or 0.3% despite the fall on Wall Street.
