Daily Market Reports | Jun 12 2009
By Greg Peel
The Dow closed up 31 points or 0.4% while the S&P added 0.6% and the Nasdaq 0.5%.
The close on the S&P 500 of 944.89 represented a new high in the rally if you got your microscope out. The previous high on June 2nd was 944.74. But we’ll take it.
The big focus last night was on the US Treasury’s last bond auction for the time being, that being US$11bn of 30-years. The long bond is important given (a) it is a benchmark for mortgage rates and (b) the further out on the curve you go, the more inflation is a significant factor. On Wednesday the 30-year yield closed at 4.76%, and Wall Street was tipping an auction settlement of 4.80%. On Wednesday the 10-year settlement of 3.99% was a bit of a wake-up call.
But the auction settled at 4.72%, and everyone breathed a big sigh of relief. The Dow was already positive in the morning, and it shot up to be 138 points higher post auction. There are still keen buyers of US government debt, it would seem, and they’re not overly worried about inflation. Thank God.
But this is where it all gets a bit silly.
Forex trades have been buying the US dollar recently in anticipation the Fed would have to raise its funds rate to entice sufficient lenders (buyers of US Treasuries). But without the inflation fear, the chance of a rate rise (if ever there were one in the first place) is diminished. So traders sold the dollar last night, down 0.6 points on the index to 79.61. (We are reminded that a meaningful breach of 79.55 is meant to be a very bearish technical signal).
And what happens when you sell the dollar? Commodity prices shoot up. And what do you get when commodity prices shoot up? Inflation!
The oil price climbed onward, ever upward last night by US$1.10 to US$72.43/bbl. Base metals slipped back into overdrive, with aluminium rising 3%, copper 4%, lead and nickel 5% and zinc 6%.
An interesting factor has entered the base metal market. Base metals have been rising on a combination of a weak US dollar and Chinese commodity buying (which is probably mostly stockpiling but also partially “real”), which has sent investment funds scurrying into the market both as an inflation trade and simply to get back in if they are actually a commodity fund. You’re not much of a commodity fund if you don’t own any commodities. Throw in short-covering (apparently there is a very large short position in aluminium, which explains why the usually sleepy metal has been so active) and what we have is a bit of a feedback loop to the upside.
But base metals began rallying in late 2008, and while the initial bounce might have been simply because they were oversold, the Chinese buying that came out of the woodwork caught everyone by surprise. In short, most assumed the Chinese would simply stop once their warehouses were full again. But that has not been the case – at least not yet. While everyone has been waiting for prices to pull back again, actual consumers of base metals (yes – there are still manufacturers in this equation) have been running down their own inventories. And now that those inventories are becoming dangerously low, prices are even higher. D’oh!
There are “real” buyers now buying base metals. At least this supports the belief in economic turnaround, but even the real buyers are getting caught in an upward snowball.
Gold barely troubled the scorer last night nevertheless, given the US dollar was weak but the successful 30-year auction alleviated an amount of fear. Gold rose a mere US20c to US$953.90/oz. The Aussie set off another one of its booster rockets to close up over one and a half cents to US$0.8198, assisted by yesterday’s not-so-bad Australian unemployment figures.
Back in the US, Wall Street was strong early in the session due to some positive data.
The weekly new jobless claims number fell by 24,000 marking the fourth straight week of falls. The continuing claim number nevertheless rose 59,000 to a new record of 6.82m. However, those keeping an eye on the “second derivative” noted that the rate of increase of continuing claims has begun to slow in the past couple of months, despite reaching record levels each month. Maybe – just maybe – the US won’t see double digit unemployment after all.
The other positive number was the May retail sales figure. A jump of 0.5% represented the first rise since February and only the fourth rise in twelve months. Unfortunately, however, the news was not necessarily as positive as it seemed. Apart from a counter-trend burst of auto buying, brought about by bargain hunters snapping up cast-offs from bankrupt automakers and closing dealerships, the bulk of the 0.5% gain represented higher gasoline prices.
One might ask: If everything was positive why did the sellers come in at the close, instead of the usual buying of late, meaning the Dow only closed up 31? Well the answer lies in that last point. While 944 is clearly a resistance level in the S&P, the market is now focusing on the oil price. Initially, an oil price rising off its US$32 low was positive for a market looking for green shoots of recovery. But now Wall Street is wondering at just what point the oil price will revert to its 2008 effect – that is, become a hindrance to the household budget, to production costs, and to the economic recovery. In the first half of 2008, when the oil price went up, the stock market went down.
The SPI Overnight closed up 7 points.
