Daily Market Reports | Jun 02 2009
By Greg Peel
The Dow rose 221 points or 2.6% while the S&P rose 2.6% to 942 and the Nasdaq gained 3.1%.
Another first session of the week, another 200 rally in the Dow. In this case, however, it was also the first session of the month, and whereas on the last two first sessions the S&P 500 closed at 909 and 910 to be going nowhere in particular, this time the S&P shot up to 942. This is significant, as the previous January high of 934 has now been surpassed and the index is at its highest level since November. More significantly, at 929 the S&P crossed over its 200-day moving average for the first time in eighteen months.
If you believe in technical analysis, this is a very bullish sign. If you believe that many people for reasons best known to themselves believe in technical analysis, the market will undoubtedly gain confidence from the breach.
The basis for the rally last night was economic data. The Chinese May purchasing managers’ index showed a second consecutive monthly reading over 50, implying the Chinese economy is indeed expanding. This data, released yesterday Asian time, was the impetus for the surge on the Australian market yesterday and needs to be considered as part of this Wall Street rally. There were, however, supposedly strong US numbers as well.
The May ISM manufacturing index was expected to hit 42 from 40.1 in April, but it reached 42.8. While better than expected and “less bad”, a number under 50 still implies contraction.
Personal income and spending data for April showed that nominal incomes rose 0.5% in April – despite rising unemployment – when a fall of 0.2% was expected. The news that Americans have more money in their pockets sent retail stocks soaring last night. It is unclear why. Real consumer spending fell 0.1% in April, implying a net result of a savings rate of 5.7% – the highest in fourteen years. The Obama tax-based stimulus package has been pocketed rather than spent as intended. The American consumer represents 70% of the US economy.
General Motors filed for bankruptcy as expected last night. While one might assume the greatest industrial bankruptcy in American history might be a dampener on the market, the filing did finally end months of uncertainty. Dow Jones wasted little time in removing GM from its industrial average, replacing it with technology giant Cisco, producer of networking equipment and network management for the internet. Dow Jones also took the opportunity to say goodbye to once great bank Citigroup, replacing it with insurance leader Travelers, once part of that same Citigroup.
The Chinese data in particular sparked an absolute surge in commodity prices last night as a wave of investment buying swept into the market. Oil rose 2.8% or US$1.87 to US$68.18/bbl. Copper soared 6% to close over US$5000/t for the first time in over seven months. Lead and nickel also rallied 6%, while zinc added 4% and aluminium and tin 3%.
It was a night for risk to be king once more. The surge in stock and commodity buying was accompanied by another significant exit from US 10-year bonds, although this time the stock market led the bond market. The yield on the 10-year jumped 25 basis points to 3.71% to be back near its highs of last week. Last week the jump towards 3.75% sent stocks tumbling on inflation fears. The market is expecting the Fed to come in and buy more bonds this week in continuing quantitative easing. It certainly wasn’t last night.
Currency traders bough the euro and pound against the US dollar but sold the yen in classic carry trade mode. The Aussie added yet another 0.8 cents to US$0.8093. The US dollar index slipped slightly from 79.25 to 79.19. Gold was unable to sustain its inflation rally against the tide of safe haven exit and fell US$4.40 to US$975.20/oz.
The risk trade is on for those who believe they might otherwise miss out. There has been plenty of undecided money sitting on the sidelines since early March. The “green shoots” rally is on in earnest as investors look through to global economic recovery and buy up stocks and commodities in anticipation. At some point, the real numbers are going to have to match such anticipation. The real numbers will be the next round of corporate earnings.
The opera is building to a crescendo. But has the Fat Lady really warmed up?
The SPI Overnight was up 48 points or 1.2%. Don’t forget the ASX 200 was up 2% yesterday on the Chinese data.
