Daily Market Reports | Jun 11 2009
By Greg Peel
The Dow closed down 24 points or 0.3% while the S&P and Nasdaq fell 0.4%.
On Tuesday night the yield on the US 10-year Treasury bond closed at 3.85%. Last night the Treasury auctioned off another US$19bn of 10-years and Wall Street held its breath. When the dust settled, the demand for the bonds did indeed exist but buyers required a better interest rate for their risk. Thus the auction closed at a 3.99% yield.
To put that into perspective, on May 8 the 10-year yield was 3.19%. In the space of one month, the cost of borrowing on the benchmark has risen 80 basis points. Think of this as your mortgage, but in this case your “house” is the United States and your loan is worth US$1.8 trillion. How happy would you be if your bank put up your variable mortgage rate by 80bps in a month? Might that not be a blow to your already stretched household budget, just when you were feeling more confident that you were getting back on your feet?
On the open in the stock markets last night, the Dow traded up 71 points and the S&P 500 hit a new 2009 high of 949. The indices then drifted off towards lunch time ahead of the bond auction. On the news of the 3.99% yield, the Dow plunged to be down 124. The secondary 10-year bond market hit a yield of 4.0% post-auction before finally the buyers came in. The final mark was 3.93% when the bond market closed half an hour ahead of the stock market.
The stock market turned around to rally back when the bond yield slipped again. When the bonds closed, the Dow surged further in late trade to its close of down 24. Two things are clear here: (a) the stock market is currently very susceptible to the bond market; and (b) there is still plenty of money looking to enter the stock market on any dip. These two factors are at odds with each other, and so we have this largely sideways drift going on at present.
If you think that move on the 10-year looks debilitating, consider that the 30-year bond yield has risen from a low of 2.5% in late 2008 to 4.76% last night. This is despite the Fed stepping into the market to buy mortgage-backed securities in order to keep mortgage rates – most of which are based off the 30-year rate in the US – low enough to encourage stabilisation in the housing market. Taking margin into consideration, 30-year fixed mortgages were on offer as low as 4.5% earlier this year and that has been attributed as fundamental to the rise of tentative “green shoots” in the housing market. That fixed rate has now blown out to 5.5% and those green shoots are under threat of withering. And all the while, the number of Americans unemployed grows.
Tonight the Treasury will auction US$11bn of 30-year bonds.
The reason buyers of bonds are demanding higher interest rates is because the US government just keeps asking to borrow more and more money. Last night it was revealed the monthly budget deficit in May hit US$190bn, marking the eight straight monthly deficit. This was higher than the April figure which was also considered grim, particularly given April is the month when annual income tax receipts hit the coffers. Economists were expecting a May figure of US$181bn. In May 2008 the monthly deficit was US$166bn.
That’s the fiscal (domestic) deficit. Moving to the US trade balance, the deficit there widened 2.2% in May to US$29bn having narrowed in April. Imports fell 1.4% but economists expect that number to decline further in coming months as the higher oil price flows through and demand backs off as a result. While falling imports help to reduce the trade deficit, the flipside is that exports fell 2.2%. The government wants imports to rise as this implies renewed domestic demand, but only if exports also rise. Otherwise America is still spending more than it earns and that means a bigger current account deficit, more borrowings, and more pressure on the US dollar.
The US dollar index nevertheless rose last night, from 79.78 to 80.24. This seems counterintuitive given bond yields are rising but once again traders are coming into the greenback on the expectation the Fed will eventually have to raise rates in order to attract the lenders the US Treasury needs.
One would thus expect a stronger US dollar to impact on commodity prices. But monetary inflation remains a spectre. Hence gold fell only US$1.10 to US$953.70/oz last night and base metals slipped ever so slightly despite their enormous surge on Tuesday. Oil, on the other hand, bucked the trend and rose US$1.45 to US$71.46/bbl.
Oil rose because weekly inventory data showed crude imports fell by 676k barrels from the week before yet gasoline demand rose by 0.4% over the same week in 2008. This implies that Americans are green-shooting their summer hols but refineries are backing off their purchases given existing supply. Take the latter as you will.
Oil also benefitted from two Chinese newspaper reports suggesting the May industrial production number – not officially due out until Friday – will show an 8.9% increase. We’ll take that as we will as well, given one assumes the “leaks” were made with a government gun to the head given leaking government data would probably otherwise mean you’d quietly disappear.
The Baltic Dry Index continued its fall losing 128 points overnight, 3.51%, to 3518.00. (See also our story from yesterday “Baltic Index Warns Of Commodity Price Correction”).
The Fed released its monthly Beige Book last night – an anecdotal survey of economic activity. The wires were keen to report the “good” news that five of the twelve Fed districts reported “the downward trend is showing signs of moderating”. For those five, this is at least a case of “less bad” rather than “good”, but one must ask: Does that mean seven districts are experiencing further acceleration of decline? How is that good?
The Little Aussie Battler remained somewhat betwixt and between over the last 24 hours, given the surging local consumer confidence number and the overnight rise in the greenback. It was relatively steady at US$0.8036.
The huge jump in confidence yesterday saw the ASX 200 barrel through resistance at 4000. Such a breach may imply there is simply enough momentum to carry the index onward to 5000, which is both a brick wall of resistance (the index did a lot of work at 5000 before the Lehman crash) and would represent a 50% retracement of the fall from the November 2007 high. However, while the turn in confidence is indeed good news, and might portend a proper recovery ahead, let’s play devil’s advocate.
The surge in confidence has been attributed to a combination of lower interest rates and petrol prices recently, but mostly to the “fact” that Australia avoided a technical recession in the March quarter. The word “recession” has powerful psychological connotations, and we must remember that markets are all about psychology with actual numbers simply a distraction. However, what the Australian public probably did not comprehend is that the day after the quarterly GDP was released, the April trade balance showed a huge drop in export receipts as iron ore exports adjusted to their new contract prices. The risk is that the June quarter may show negative growth again.
What’s more, the Australian stock market has been bought up from March on “green shoots” which have mostly manifested themselves in higher commodity prices. When the GDP number came out the index was bought again. And when the consumer confidence number came out it was bought again. Confidence was supposedly connected to the GDP and yet the market went in for another round. Is there a snowball effect here (albeit upward)? How much money is entering the market right now on missing-out “panic”?
The SPI Overnight was up 4 points.
