The Overnight Report: All Good Things Must End

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By Andrew Nelson

The Dow gave up 36 points or 0.38%, the S&P 500 ended the day 0.2% lower, but some lingering strength in the tech sector saw the Nasdaq finish 0.05% higher.

All three major gauges were up in the morning thanks to a tech boost from Dell and Intel, but the broader market turned weaker as investors digested the worst consumer sentiment read in four-months. And unlike the last few days, buyers didn’t reassert themselves today to drag the major gauges back into positive territory by the close.

The advance certainly seems to be slowing, with investors becoming increasingly concerned that after sending stocks up more than 45% percent since early March, the rally may be close to having run its course. And with a large number of traders still away on their summer vacations and volumes seasonally thin, it could be that there may just not be enough buyers in the market (or willing to jump off the fence) to keep taking stocks higher.

Still, the three major indexes were moderately higher for the week, making it six weeks of gains out of the last seven. The S&P 500 and Dow industrials are up about 4% for the month, largely thanks to a big rally across financial stocks, while the Nasdaq is up about 2.4% on the month. The S&P 500 and the Nasdaq are also on track to make it six straight months of gains.

The day started with a positive pair of tech tales. Chipmaker and technology sector leader Intel increased its revenue forecast for the third quarter, citing stronger demand for its microprocessors and chipsets. The company expects sales of US$8.8bn to US$9.2bn, which was up from its previous US$8.1bn to US$8.9bn range. Intel, which is a component of all three major market indices, is often seen a bellwether for the tech sector as a whole.

PC maker Dell also came to Intel’s party and despite reporting weaker sales and earnings late Thursday, the numbers still beat expectations. The company also upped the good news after offering what was an encouraging outlook for the second half of the year.

Another tech stock in the news was Apple, which has signed a multi-year deal with China Unicom to bring the iPhone to China. Not bad news given China is now the world’s largest cellphone market. The deal brings to an end months of speculation as to which Chinese company would bring Apple’s products into this lucrative market. Despite the good news, shares were little changed.

US home loan funding companies, Fannie Mae and Freddie Mac extended their winning ways, as did Citigroup, with the three of them once again providing a backbone for the financial sector that otherwise wouldn’t be positive. (See yesterday’s overnight report for a more detailed insight into the influence that these stocks have had over the financial sector this week.)

But consumer and healthcare stocks performed poorly on a set of economic data that showed continued weakness in income and spending. Consumer sentiment in August slid to a four-month low, falling to 65.7 from 66.0 in July. Government data did indicate a 0.2% gain in spending in July, but much of this was due to the Cash for Clunkers program. More importantly, there was no gain in personal income. The recent rally has been fuelled by improving economic data and rising risk appetite, but with unemployment still a worry and with income flat, increasing restraint seems to be emerging on the market’s appetite for risk.

The healthcare sector is also struggling under the weight of some serious misgivings about the direction of Washington’s health care reforms. Congress will soon reconvene and the healthcare debate is near the top of the agenda, making this a sector that many will want to limit their exposure to for the time being.

The US dollar shrugged off the consumer sentiment read and after early weakness, gained against the yen and euro, erasing its weekly loss against the latter. The greenback also gained versus a basket of currencies on Friday, but it lost ground on the Aussie. Yet despite the news, commodities remained a bright spot, with crude prices registering a slight gain.

While crude oil was fairly restrained and trading volatile, it still ended slightly higher despite the stronger dollar, boosted by the increase in consumer spending. After a choppy day, crude for October delivery gained US25c to end at US$72.74 a barrel after being down to as low as US$71.78 a barrel earlier in the session.

Gold also ignored the jump in the dollar, with investors focusing in on the weak consumer data and the ensuing perception of increasing risk in the market. The metal’s safe haven status reasserted itself and saw the price pick up US$6.90 to US$956.30, erasing weekly losses. Meanwhile, bond prices were little moved, with the yield on the 10-year Treasury note dipping to just 3.45% from 3.46%.

The greenback’s building in strength over the course of the day and the weak consumer data from the US also saw base metals trim their gains late in London trading. Still, the complex was higher, just not as much, when trading finished for the week. The standouts were copper and lead, which both ended better than 3% higher.

Closer to home, the SPI was up just 2 points, with Australian investors contending with the conflicting influences of positive corporate reporting, stronger base metals, but a weaker US consumer and an ensuing drop on Wall Street. There’s plenty to think about Monday morning.

And speaking of Monday morning, the Australian reporting season isn’t over yet. Look out for interim and full year reports from Corporate Express ((CXP)), Harvey Norman ((HVN)) and Paladin Energy ((PDN)).

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

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