Daily Market Reports | Apr 28 2009
By Greg Peel
The Dow closed down 51 points or 0.6% while the S&P lost 1.0% and the Nasdaq 0.9%.
Wall Street awoke Monday morning under the uncertain cloud of a swine flu outbreak which seems to have bloomed overnight. With some 2000 cases in Mexico and 150 deaths, 40 cases in the US and cases across the globe from New Zealand to Europe the pandemic warning bells have sounded. The World Health Organisation, at about 6am Sydney time, raised its health alert level from 3 to 4 on a scale of 6.
That the world has recently experienced both bird flu and SARS was influential in trading last night both negatively and positively. On the negative side, it was remembered that the previous scares slowed Asia’s recovery from the 2002 recession and that any travel related industries were severely impacted. On the positive side, Wall Street recalled that the effect on stock markets was neither severe nor lengthy and that the world is now prepared for such outbreaks and is ready to contain them with emergency response procedures and stockpiles of drugs such as Tamiflu.
To that end, Dow futures looked ominous early but a sharp drop from the bell of around 75 points was quickly turned into a 50 point rally by midday. From there stocks drifted off to be down 50 at the close. Volume was low in the broad market as traders elected to take a cautionary stance, not just because of swine flu but because of the upcoming first quarter US GDP release, the Fed’s monetary policy update, and the still overhanging bank stress tests. Swine flu merely provided an excuse to stay out.
Traders did not, nevertheless, stay out of those stocks deemed to be directly impacted by the health scare. Hotels, cruise lines, airlines and generally anything to do with transport were slammed. On the flipside, any biotech with a flu drug – even if its still in the trial phase – was bought up some 80% or so just as Biota ((BTA)) was in Australia yesterday.
There was a much more worried response in commodities markets however. Oil and base metals were slammed early as traders feared this exogenous event could not have come at a worse time in terms of trying to foresee some sort of economic recovery down the track. Oil fell 7% from the open but as Wall Street broadly shrugged off the fear, it recovered to close down 2.7% or US$1.41 to US$51.14/bbl.
Base metals followed a similar path – sold down heavily early as London awaited Wall Street’s response but making a recovery later in the session. The net damage was still notable nevertheless, with aluminium down 1%, nickel and tin down 2%, copper and zinc down 4% and lead down 6%.
An obvious target of fear was pork futures (authorities in the US were forced to issue a statement confirming that one could not actually catch swine flu from eating pork) and related feed crops such as soybeans.
Commodity prices were not helped by another rush to the safety of US Treasuries which sent the greenback higher. This forced the Aussie down a cent to US$0.7107. Gold, on the other hand, was caught between a similar flight to safety (upward influence) and a response to news over the weekend that China had managed to buy some 400t of gold without anyone noticing. (See: “Power Shifts From West To East; yesterday). Having anticipated Chinese gold buying for some time, the market was disappointed to learn China managed to so domestically. In the end, gold fell US$7.30 to US$906.20/oz.
The pandemic story provided a cautionary backdrop to what was otherwise business as usual in stock markets as the earnings season rolls on. There was the usual mix of wins and losses, but the “less bad” theme persists. Helping Wall Street to shake off swine fears however was news out of General Motors.
The new GM CEO has outlined the latest to plan to keep the bankruptcy wolves from the door, while maintaining that if bankruptcy is the only real solution, so be it. The company will close up to 42% of its nationwide dealerships and discontinue the struggling Pontiac brand. When you consider Toyota sold more cars in the US last year with 1200 dealerships than GM with over 6000, this should not have been too tough a decision to make. But with the government a major investor, it’s all about jobs.
The other news related to how GM would deal with the bondholders, the unions, and the government investment. Cutting a long story short, unsecured bondholders will be offered 10% of the company’s shares, unions 20% and the government 50% in a deal which is distorted well in favour of the government despite its level of investment, largely in favour of the unions (and their healthcare entitlements), and screws the bondholders. The latter party is livid. On that basis, bankruptcy may yet be the final solution but one must consider if GM had been allowed to fail by the government, the unsecured bondholders would have gotten zip.
The GM news was helpful in turning around metals prices last night. London fears that part of the bankruptcy process would be to release strategic stockpiles of raw materials held by automakers onto the market. With Ford sitting pretty, GM hanging on and only Chrysler looking terminal, this fear is somewhat ameliorated. GM shares jumped 20%.
Despite Wall Street’s ultimate weakness, the SPI Overnight closed up 2 points.
