Daily Market Reports | Jun 10 2009
By Greg Peel
The Dow lost 1 point while the S&P gained 0.3% to 942 and the Nasdaq gained 1.0%.
It’s been a frenzied week among the thirty Dow stocks so far. The average jumped a point on Monday but gave it all back last night. Newbies Cisco and Travelers are no doubt thinking “welcome to first grade”.
The S&P 500 did manage to put on 3 points, or 0.3%, to remain 2 points shy of its 2009 high of 944. The Nasdaq, on the other hand, has now gained 14% for 2009 as the tech world continues to abandon connection with traditional industry. Technology stocks have two things going for them at present: (1) Emerging market populations are just now buying their first mobile phone, computer, video game box, Blackberry etc. Young people from Shanghai to Mumbai, from Moscow to Rio, are tech savvy and eager to join the first world; (2) Tech companies earn on average 50% or more of their profits outside the US. A weaker US dollar is thus a bonus.
And that last factor is very much the focus of Wall Street at the moment.
Until recently, the US dollar has tended to trade in opposition to bond prices. As the market has felt it safe to exit the safe haven of short-end US Treasuries and redeploy money into more diverse risk plays across the globe the US dollar has weakened. But as bond yields have risen, inflation fears have grown. So much so that last week the trend reversed. Foreign exchange traders began to buy the dollar again in the belief inflation would force the Fed to raise interest rates. Many in the market believe this is a ludicrous idea, given the Fed is still implementing quantitative easing as a substitute for a cash rate it cannot lower below zero, and the Fed still believes deflation is more of a risk than inflation.
Last night the first of this week’s bond auctions went well. The US$35bn of 3-years was oversubscribed. On this basis the market bought 10-years again, sending the benchmark yield back to 3.85% from 3.9% on Monday. But those buying US dollars ahead of a perceived cash rate increase were forced to sell again. If US bonds are not finding buyers, then one can argue the Fed would need to raise the interest rate to attract support. The 3-years, at least, are still popular.
The irony is, of course, that a weaker dollar will cause inflation anyway. Last night the US dollar index fell 1.1 points to 79.83. The real test in the bond market will come tonight when the Treasury auctions US$19bn of 10-years.
To hedge against reserve currency inflation, one can sell bonds, buy gold, or buy commodities. Last night gold ticked up US$2.70 to US$954.80/oz. Gold is battling against those becoming more confident in global economic recovery and thus retreating from the safe haven. For gold to test US$1000 again, the greenback would really have to tank.
But last night base metals went berserk. A wave of investment fund buying hit the market, sending aluminium up 3%, copper and zinc up 4%, nickel up 5% and tin and lead up 6%. Oil Jumped US$2.72 to US$70.61/bbl. The global economy might be recovering, but very slowly at best. Why are commodities so strong right now?
Commodities are strong because they were oversold, because the US dollar is weakening under deficit pressure, and because China in particular is showing positive signs of recovery. But more importantly, commodities have simply become another investment asset in recent years. They were oversold in the second half of last year because commodity investment funds were forced to liquidate in droves. They are soaring in the first half of this year because those investment funds have to redeploy their cash and get back in. Just as a rising stock market has brought a flurry of Johnny-come-latelies who fear missing out, so, too, have commodities seen a late rush of investment buying from those afraid of being left behind. Commodity prices are now far more volatile than they ever were in the previous century because investors can trade commodities directly with ease, rather than having to rely on investment in resource sector stocks.
This naturally begs the question: At what point will commodities become overbought again? The advice from veteran traders at present is don’t step in front of a freight train.
The commodities surge is clearly affecting a rise in the shares of resource stocks. But this rise is not having any impact on stock indices, which have gone into sideways mode, suggesting there are enough offset sectors holding the indices back. One of those is financials. Financials led the rally from March but now the market will need to see actual earnings results to be convinced banks are worth buying up any further. Many US banks have already doubled in price.
Last night the government announced it would allow the payback of a total of US$68bn in TARP funds from ten of the nineteen TARP-funded banks. The list of those ready to pay back funds included JP Morgan, Goldman Sachs, Morgan Stanley and American Express. This leaves a list of banks not in a similar position which includes Citigroup, Bank of America and Wells Fargo.
The payback of TARP funds is seen as a positive for the banks involved because they are released from the shackles of more extensive government oversight and particularly from the 90% executive bonus tax. But there are many critical of government in allowing such payback so soon. Are these banks really back in solid positions or are they just eager to shake off strict rules? Has the American taxpayer made enough out of its risky rescue investment to justify cashing in at this point (albeit the government still holds warrants in the banks)? Will the payback from some but not others cause a split into “have” and “have not” banks, such that capital will flow out of the latter and into the former? Has the government consigned the remaining strugglers to struggle even more?
Treasury Geithner does not think so, but many commentators do. Some are suggesting that given Congress will not increase TARP funds, the government just wants the money back to throw into other rescues, such as the auto industry. Suffice to say, the bank index did not rally on the news last night as individual stock movements were evenly split.
The Dow did not manage to breach more than 40 points in either direction last night. Volume is very light at present which can be put down to summer mode, but one gets the feeling something soon has to give. The VIX volatiliy index remains relatively high at 28.3.
The SPI Overnight was up 24 points.
