Daily Market Reports | Sep 24 2009
By Greg Peel
The Dow closed down 81 points or 0.8% while the S&P lost 1.0% to 1060 and the Nasdaq lost 0.7%.
If you were a Wall Street trader there was no point in turning up to yesterday’s session until 2pm. Stock indices went dead sideways on the flatline up to this point. But shortly after 2pm the market began to spike, and at 2.15pm there was a sudden surge that saw the Dow up 88 points about five minutes later, breaching 9900 for the first time. But that was it. Wall Street then turned on a dime and began a swift sell-off, with the Dow falling 169 points to its low and close of the session.
It was a case of “sell the fact”.
At 2.15pm the Fed released its latest statement on monetary policy, which economists described as being the most upbeat in about three years:
“Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing…”
This was enough to send the markets surging for about five minutes. Only last week Fed chairman Ben Bernanke had declared the US recession as likely over, and Wall Street had surged on that statement as well. The Fed was never going to change its mind in the space of a few days, so realistically the Fed statement was old news. But in making his comment last week, Bernanke might just as well have declared Noah to likely have survived the flood, given a couple of months worth of similar opinion from all and sundry.
And the Fed was always going to keep its zero to 0.25% funds rate range intact, and reiterate, for the umpteenth time, that such “exceptionally” low rates will remain in place for “an extended period”. Economists are arguing as to just how “extended” the period might be, with expectations of the first rate rise spreading from mid 2010 all the way into 2011. To support its low rate policy, the Fed yet again stated that it expected inflation “to remain subdued for some time”.
Which only left the question of exit strategy as potentially “new news”. But even on this point, the Fed fell right in line with expectation. Extraordinary measures taken by the Fed over the course of 2009 – measures required on the basis you can’t actually drop a funds rate into the negative – have included a program to buy US$300bn of Treasury bonds (quantitative easing), a program to buy US$200bn of agency debt (Fannie/Freddie), and a program to buy US$1250bn of mortgage-backed securities. The latter two specifically target the housing market – the supposed source of the GFC.
Quantitative easing was originally due to end in August, but the Fed decided to extend the purchase period out to December while maintaining the same target total. In this way it was providing a longer tail to monetary stimulus. On this basis, economists had already decided prior to last night that the Fed would announce something similar with regard to the other two programs.
And that’s exactly what it did. While not increasing or decreasing the amount of intended agency and mortgage purchases, the Fed has now extended the programs to the end of March.
Newswires are suggesting this morning that Wall Street tumbled after the Fed statement because it suggested the end of extraordinary measures was now clearly nigh. That is not the case. The Fed was never going to increase the value of such measures while at the same time suggesting economic recovery, so the fact the timetable has been extended into a tail-off rather than a sudden expiry should actually be positive. Wall Street fell last night because the market has run very hard on expectation of everything that’s now happened, to a sufficient extent. It was time to cash in.
Does this mean we must now endure the long-awaited pull-back? Not at all. The late money is still sitting on the sidelines looking for an entry point, and with the close of September quarter rapidly approaching, there will still be fund managers needing to show a positive equity weighting in their portfolios. Last night was just not a good time to stand in front of the freight train. There will, however, likely also be funds and traders happy to cash in for the quarter and rest on their laurels through that dangerous month called October. But the sheer weight of open positions in put options set just below the market at this level suggests little selling actually has to occur. There is unlikely to be panic selling when such protection is in place.
And on that point, note that the VIX volatility index jumped up less than 2% last night to 23. The VIX has not managed to fall under 20 during the rally – a level which is usually breached, right down towards 10, when exuberance is high. This is because wary and sensible traders have run with the rally while still keeping a safety net in place all the way along, in the form of put options. And on the other side of the equation, the VIX has not leapt markedly on these rare but sharp down-days because demand for protection has already been largely sated.
The US dollar did its now familiar mirror image routine last night, initially falling on stock market buying (to under 76 on the index which is as low as it’s been this year) but bouncing quickly on the stock market reversal. At the end of the session the USD index marked a 0.4% rise from last night to 76.37.
Dollar up means commodities down, and gold duly obliged with a US$6.40 fall to US$1008.00/oz. Base metals in London closed mixed to weak, with aluminium down 1.5% and copper down 2%. However, even the late London trading session is closed by 2pm New York, meaning base metal prices have not yet reacted to the Fed statement or its aftermath. (Note that New York metal futures markets also close with London).
It was different story for oil, which had its own problems to worry about.
Why oil traders run screaming from one side of a listing ship to the other every week when the weekly US inventory numbers are released is anyone’s guess, but last night it was announced crude inventories had jumped when analysts had expected a fall. Oil duly plunged 4% or US$2.79 to US$68.57/bbl, once again showing just how trigger-happy the market is currently. A stronger US dollar didn’t help. Of course, this time last week it was all the other way around, and probably will be again next week. If you want an accurate prediction of weekly inventory movements it would seem the best thing to do would be to take the analyst consensus figure and reverse the sign.
On all of the above, the Aussie lost half a cent to US$0.8691.
A bit lost in the excitement last night was the US Treasury auction of five-year bonds, which was not quite as oversubscribed as the two-years on Tuesday but still well patronised. Once again, foreign central banks accounted for 45%. The ten-year yield dropped to 3.41%, safe in the knowledge that the Fed was not suddenly about to exit the market. (The Fed does not buy in auctions incidentally, but on the open market.)
The SPI Overnight fell 28 points or 0.6%.
Read the full Fed statement here. Bring on the G20.
Please note: All paying members at FNArena are being reminded they can set an email alert for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new story has been published on the website.]
