The Overnight Report: Choppy Seas

This story features PALADIN ENERGY LIMITED. For more info SHARE ANALYSIS: PDN

By Greg Peel

The Dow closed up 30 points or 0.3% while the S&P added 0.2% to 1028 and the Nasdaq gained 0.3%.

It was the choppiest day on Wall Street for a while, one in which 25% of not remarkable share volume was again concentrated in the three financial stocks Citigroup, Fannie Mae and Freddie Mac. At 10am – half an hour into the session – the Dow was up 111 points. At 10.30am it was only up 33 points but by 12.30pm it was back up 98 points. The Afternoon then saw a choppy decline to the finish of up only 30 points.

There was plenty of good news to consume, and it was that which gave the market its impetus to push higher.

The Conference Board measure of consumer confidence was expected by economists to register 47.5 in August to mark only a small increase from the July reading of 47.4. It came in at 54.1, however, which sent stocks racing from the bell.

Unlike most economic indices this is not a 50-neutral measure, suggesting confidence is now growing whereas previously it was contracting. It is merely a score out of 100 and its average is in the 70s. In bull markets scores over 90 are the norm. Hence economists warned that there’s still a long way to go.

The next big bit of news was hat the Case-Shiller national home price index rose 2.9% in June to mark its first gain in three years. The 20-city index posted its second consecutive gain in a similar timeframe, of 0.8%. The national average house price is down 14.9% year on year.

Again, the warnings accompanied the release. Economists were quick to point out the market should not necessarily take a positive reading as a definitive indication the housing market has bottomed. For starters, the Case-Shiller is not seasonally adjusted and this is a Spring reading – a time when buying interest is always at its height. Secondly, prices are being supported by the government’s US$8000 tax credit grant for first homebuyers, and unless extended that will end in November. Thirdly, banks have been offering mortgage payment moratoriums in order to stem the downward spiral of mortgage foreclosures and that has had some impact on preventing further foreclosure sales. Fourthly, despite this, foreclosure rates continue to rise into record territory, and unemployment is still predicted to reach 10%.

The other good news last night was no great shock, but at least an element of relief. President Obama took a break from his break to announce the reappointment of Ben Bernanke as chairman of the Federal Reserve. This was known before the market opened but was formally announced in the session.

Bernanke was a Bush appointee who took the reins just as the housing bubble was peaking. Coincidentally he is specifically a student of the Great Depression and its causes. One might say “if ever there was a man for the job” but Bernanke came under a lot of criticism early in the credit crisis for not moving fast enough. Now that the economy appears to have stabilised however, Bernanke is God. Wall Street was expecting a reappointment, given now is hardly the time to start bringing in someone new for the sake of what is traditionally a rolling position. Let Uncle Ben see it through and then give him a rest. Besides, we want to see just how he is going to get out of it – the exit strategy for quantitative easing required at some point to prevent hyperinflation. He got us into it…

On that note, the Congressional Budget Office estimated last night the 2009 fiscal deficit should total US$1.6 trillion – the largest amount as a percentage of GDP (11.2%) since World War II. That is, however, down from an earlier estimate of US$1.8 trillion.

The recipe was thus on the page for what might have been another euphoric rally on Wall Street. But it didn’t happen.

For many oil traders, US$75/bbl has been a target since the rally began. Indeed, a popular prediction has been for oil to range-trade between US$65-75. For the first time since last year, oil last night hit US$75 – US$75.02/bbl to be precise – and so the bell was rung and in came the sellers. There was no specific impetus other than the technical level, and indeed oil ignored the above data which on any other day recently would have been bullish by plunging instead, to be US$2.32 down on the day by the close at US$72.05/bbl .

The US dollar index was barely changed on the day, and gold only slipped US$3.40 to US$944.60/oz, so oil had no other excuse. The subsequent drop in energy stocks was a lot to do with why the stock market faded away towards the close. But commentators also suggested that stock momentum simply seemed to be lacking.

The London Metals Exchange closed just as Wall Street was heading back towards its lows, so all metals bar lead – which is still in favour following Tuesday’s news – were weaker for the session. Aluminium and copper each fell about 1.5%.

The Aussie drifted back to US$83.51 and the SPI Overnight gained 16 points or 0.4%.

Earnings watch today includes Paladin Energy ((PDN)), Transfield ((TSE)) and Westfield ((WDC)).

For the full list of reporting dates and major economic data releases please refer to the FNArena calendar.

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