Daily Market Reports | Jun 17 2009
By Greg Peel
The Dow fell 107 points or 1.3% while the S&P lost 1.3% to 911 and the Nasdaq lost 1.1% Another 1.2% fall would see the S&P breach the 900 level and perhaps trigger a more meaningful pullback. It all depends behind which tree the buyers are waiting.
The indices fell out of bed late morning after a slightly positive start. An attempt to rally on the death was quickly thwarted by late selling. A positive open to counter Monday’s 180 point fall came in the form of May housing starts, which rose a huge 17.2% from April. It was all about apartment blocks, given single-family starts rose only 7.5% while five-or-more-unit blocks jumped 77.1%. Building permits, the precursor to starts, were up 4%.
This was the good news, but Wall Street didn’t exactly take off as it might have done a month or two ago. One reason is that such positive data are now only confirming why the S&P is above 900, not egging it to greater heights. The other reason was the release of the May producer price index.
Economists were expecting the May PPI to jump by 0.6%, but it only managed 0.2%. Given the recent surge in gasoline prices, this did not bode well for wider demand. The core PPI (ex food & energy) fell by 0.1% when economists expected a small positive.
A certain Mr Bernanke would have smiled contentedly at this release. Tonight’s CPI number will be more relevant but it is clear that there is little sign of inflation at the wholesale level, and that disinflation (ex energy) still rules. The market had been getting itself all worked up about monetary inflation in the face of record national debt, forcing up commodity prices (in a feedback loop) and selling off US long bonds. Bernanke is otherwise convinced that deflationary pressures allow for combatant quantitative easing and that high inflation is not a threat. Bonds rallied last night, sending the 10-year yield down to 3.67% after having peaked at 4.00% last week.
The PPI was not good news for retailers. Deflation is the curse of the retailer as it implies lack of demand for goods and threatens the spectre of being stuck with excess stock. While inventories have been run down to bare minimums over the past several months, if no one is buying then earnings will be hard to achieve. Thus on the release of the data, US retail stocks began to dive, setting off the drop to 100 points down in the Dow.
Accelerating the down-move was the May industrial production number. IP fell 1.1% – slightly more than economists expected. April was revised down to a 0.7% fall from a previous 0.5%. Output is now down 13.4% year-on-year which is the largest yearly decline since 1946. It has fallen for 16 of the last 17 months, which takes us back to December 2007 when the recession is deemed to have begun. Output has fallen 14.8% since that time.
Capacity utilisation fell to a record low 68.3% in May. To put it another way, close to third of all US industrial capacity lays idle right now. This is another deflationary sign. Price-pull inflation will only occur if demand is outstripping supply. Demand has a long, long way to recover before US factories are struggling to keep up again.
The PPI and IP numbers were not healthy for the US dollar, and on a relative basis nor were some healthier data on the other side of the world.
German IP has also not shown any signs of recovery yet, but last night it was revealed the ZEW economic sentiment index jumped to 44.8 this month from 31.1 last month. Believe it or not, this is the highest reading in three years. Meanwhile, Japan’s IP has been down the gurgler as well, but last night the Bank of Japan announced that conditions had “begun to stop worsening”. That’s our old friend “less bad”.
The US dollar index had traded lower than its 80.75 final mark (-0.33) but received a boost when the first BRIC summit, being held in Russia, concluded and announcements were made.
It has raised the hackles of many Americans that the leaders of Brazil, Russia, India and China should meet in private without the US being involved. How dare they! It’s like a group of disgruntled MPs plotting against the prime minister. There was a perfectly good G8 (G7 + Russia) finance ministers’ meeting over the weekend and a G20 (which includes BIC) summit coming up shortly. Why isn’t this sufficient for them?
As the leading emerging nations of the world, the BRICs have decided it’s time to talk turkey between themselves now. This was the first such summit of this disparate group of cultures, and it mostly achieved an agreement to hold further summits and foster cooperation. Wall Street was poised for some statement suggesting the BRICs would shortly abandon the US dollar, but it was not forthcoming. Indeed, no mention was made either way. The BRICs between them control 30% of the world’s foreign reserves including more than 40% of US debt.
The US dollar thus came back from the brink last night. Gold rallied US$6.70 to US$934.70/oz on the net fall, ignoring disinflation signals. The Aussie remained relatively steady at US$0.7942.
Oil got a wake-up call from the economic data, and is starting to look like a kid who’s climbed too far up a tree and has suddenly realised just how high he is. Oil fell US41c to US$70.21/bbl.
Base metals had an interesting session in London. Initially they wanted to rally after two days of falls, but that was soon stymied by the US data. The result was mixed to down, with copper falling 1% to US$4955/t, breaching the 5000 level. But to again draw on the kid-in-a-tree analogy, it was revealed that total inventories of all LME-listed products reached an new all-time high of 5.5 million tonnes, with aluminium also a record individually.
The London Metals Exchange has storage warehouses across the globe, and Basemetals.com noted last night on the news that “This underlines the current supply, especially in China, where record imports earlier this year caused a sharp and sudden build-up in inventory levels”.
The SPI Overnight fell 38 points.
The VIX volatility index on the S&P 500 jumped 6% to 32.7 last night, signalling building fear. With quadruple witching due on Friday, the market could well be volatile from here and buyers warded off. Tonight President Obama reveals his financial market regulation proposals, and that’s also feeding an air of concern.
