Daily Market Reports | Oct 28 2009
By Greg Peel
The Dow closed up 14 points or 0.1% while the S&P fell 0.3% to 1063 and the Nasdaq fell 1.2%.
The US dollar finished down against the yen last night, up against the euro, down against the pound, and up against the Swiss franc. The net result on the index was a tick up from Tuesday’s 76.07 to 76.20. The level of the US dollar is fundamentally the most important driver of the US stock market at present, and sessions like last night do little to resolve directional issues.
The stock market is currently nervous. It is most nervous about the potential for Ben Bernanke to subtly change the language in his monetary policy statement next week, qualifying the “exceptionally low rates for an extended period” stance. No one expects a rate rise just yet, but an indication of a rate rise down the track is enough. Some say the Fed has become nervous about inflation. Others say deflation still rules. Some say the Fed is worried about the dollar. Others say the dollar is not the Fed’s concern. All agree that the dollar is poised between its longer term depreciation trend and its shorter term heavy weighting in short positions. Many expect a bounce.
A bounce would send commodity prices and the stock market lower. Many have been waiting for a pull-back in an overbought stock market anyway. Others still point to all the “cash on the sidelines”. Opposing views create “a market” but this market is more confused than simply opposed.
The tech sector was a good source of confusion last night. Tech stocks have been sold off these past couple of days as the dollar has bounced, given tech is highly reliant on exports. Most of the thirty Dow components are also exporters, but last night IBM, which is also a tech stock, announced it would double the size of its share buy-back. That pushed IBM shares up against the trend, dragging the Dow into positive territory, while the Nasdaq fell and the S&P 500 split the difference. Technicians were watching for an S&P break below 1060, which they suggest will signal a down-move. It didn’t happen last night.
Despite the slightly stronger dollar, oil, gold and base metals all finished to the upside, albeit unconvincingly. This helped the S&P hold its ground.
Oil rose US87c to US$79.55/bbl as Visa noted a pick-up in gasoline demand as measured through its credit card activity. Analysts are also expecting the Energy Information Agency to announce a drop in gasoline inventories in the weekly numbers tomorrow (which strongly suggests they will have risen). And the oil pit is also now somewhat focussed on the latest shenanigans in Iran, and the argy-bargy surrounding international demands for Iran to move its nuclear enrichment to neutral grounds. All the above had oil up despite the greenback.
Gold rose a mere US70c to US$1039.00/oz after its big fall on Tuesday, but silver, which has had an even more spectacular run-up than gold, fell 2.4% just to add to the confusion.
Base metals also saw selling on Tuesday, so they merely stabilised last night and in the end didn’t much trouble the scorer. From all of the above, the Aussie was unmoved at US$0.9150.
Confusing signals were provided by last night’s economic data releases.
The Case-Shiller 20-city house price index rose 1.2% in August to mark four consecutive months of improvement. Gains were enjoyed in 17 of the 20 largest cities and commentary suggests the housing market has stabilised. Prices remain down 11.3% for the year and 29.3% from the peak. Separate data show some 70% of house purchases made recently are for houses below US$250,000 in value, emphasising the impact of the first home-buyer tax credit. Home builders are terrified the expiry of this credit, set for the end of November, will mean a rapid return to market weakness. They are lobbying Congress hard for an extension but it is not yet clear what the outcome may be.
Despite all the talk of a Fed rate rise, the Conference Board measure of consumer confidence surprised economists by falling for a second month, down to 47.7 from 54.3 in September (this is not a 50-neutral index; a measure of around 80 is considered even money). The pervading factor was a fall in the employment availability element to a 26-year low. While previously all the attention was on house prices, now it is on the unemployment rate. Such numbers support the Fed’s view US households will continue to rein in spending, leaving little reason for an interest rate rise.
And if all of that wasn’t confusing enough, the afternoon brought the biggest auction of US two-year Treasury notes in history. Ever since the Treasury announced auctions of US$123bn of notes would be held this week, including a massive US$44bn in two-years, bond markets have been nervous. The ten-year yield has gained about 20 basis points. The fear is the world will run out of appetite for US debt.
They needn’t have worried. It was the best received auction since December 2008 and the two-year yield plunged 9 basis points to 0.92%. The ten-year yield dropped 11 basis points to 3.45% in sympathy. Foreigner buyers accounted for 44.5% (officially) which was slightly up on the 42.6% average of the previous round of sales.
In December 2008 the world was rushing into the safe haven of US Treasuries and out of stocks as the credit crisis began to play out. The shorter term two-year is the Treasury safe haven of choice. Why buy US debt in a crisis? Because the US economy is still far and away the world’s largest and the US remains the most powerful nation on earth. But after almost another full year of massive, massive, Treasury debt issuance, why is the world once again rushing into this supposed safe haven?
Perhaps its a sign of fear the stock market has run its course for now.
What the demand for two-years shows (and we have fives tonight and sevens on Thursday night) is that anticipation of a need for a Fed rate rise might, again, be premature. On that basis, however, the dollar needn’t bounce and commodities and stocks needn’t fall. Confused? So is everyone at present
The SPI Overnight was down 21 points or 0.4%, ignoring the Dow and outpacing the S&P 500.
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