Daily Market Reports | Sep 23 2009
By Greg Peel
The Dow closed up 51 points or 0.5% while the S&P gained 0.7% to 1071 – its first close above 1070 this year – and the Nasdaq added 0.4%.
After a couple of days of weakness it was back into positive territory for Wall Street last night as markets chopped around in the morning before nudging highs and then trading sideways in the afternoon. It had appeared on Monday that currency traders were squaring up their short US dollar positions ahead of the Fed announcement and G20 meetings this week, but last night selling returned to the greenback as the euro pushed up through US$1.48 for the first time in 2009.
The US dollar index subsequently retested 2009 lows, marking 76.07. This served to reverse recent weakness in commodity prices, driving S&P energy and materials sectors higher in the session. Financials also had a return to favour last night, having recently underperformed most risk sectors following its leadership role earlier in the rally. Financials represented the largest sector weighting at around 20% of the S&P 500 prior to the GFC. They fell to near 10% in the chaos, but have since returned to second place (behind energy) at around 15%.
As we near the end of the third quarter, the financial sector’s gradual increase in weighting is providing a dilemma for fund managers who were slow to move in the rally. If they were underweight financials in March or June they will be even more underweight in September given the sector’s improved weighting, thus forcing purchases at the highs to return to at least neutral weight.
But it was a US dollar story last night as a falling greenback quickly reversed recent weakness in oil, sending crude up 2.6% or US$1.84 to US$71.55/bbl. Base metals were similarly strong in London, with aluminium, copper, tin and zinc all posting 1-2% gains while nickel rose 4% and lead 5%.
Interestingly, lead was the only metal not to record a daily LME inventory fall last night, while falls in all the other metals encouraged hope that the seasonal fourth quarter off-take period was beginning to get into gear. For copper, the drop in daily inventory was the first following an unbroken 17-day run of increases. But the flipside of such hope comes from China. Basemetals.com notes Chinese imports of refined copper were last night reported to have fallen 25% in August from July.
It was thus not a surging response on the LME and metals pulled back later in the session. Metals are currently stuck in a sideways range, fighting a weak dollar on the one hand and lack of physical demand on the other.
Economic data releases were mixed last night in the US. The government’s house price index rose 0.3% in July, but a previously announced 0.5% gain in June was revised down to only a 0.1% gain. The index is down 4.2% in twelve months and 10.5% from its peak, but as it only measures the price of houses with Fannie/Freddie mortgages, it is not capturing movements in anything above about a US$700,000 value property. More expensive homes have suffered the bigger falls.
After big jumps in the New York and Philadelphia Fed economic indices last week, the zero-neutral Richmond Fed index remained steady this month on a healthy plus 14. The Richmond index is not considered anywhere near as influential in the wider scheme of things.
As we ponder the plight of the US dollar, last night began yet another record week of Treasury bond auctions. Each month the value of Treasury issues ticks slightly higher. But while it might appear the dollar is out of favour, US bonds are not. Last night saw the greatest proportional level of demand for a two-year auction since September 2007, despite that auction being only US$18bn and this one US$43bn. Interest from foreign central banks remained relatively steady at 45%.
One factor which may have encouraged domestic buying in bonds last night was the expiry of the government’s money market fund guarantees, put in place last year when such cash funds began to “break the buck”, or trade into negative return territory. With no further guarantees in cash, government bonds look safer once more. Tonight sees US$40bn of five-years being auctioned followed by US$29bn of sevens on Thursday. The ten-year bond yield fell last night to 3.45%.
Gold was also a beneficiary of US dollar weakness last night, bouncing back sharply after a couple of nervous days of weakness. Gold jumped US$10.90 to US$1014.40/oz.
The Aussie similarly found a new lease of life, jumping over a cent in 24 hours to US$0.8739.
The SPI Overnight gained 19 points or 0.4%.
Tonight the Fed will issue its latest monetary policy statement.
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