Daily Market Reports | Oct 30 2009
By Greg Peel
The Dow rallied 174 points or 1.8% while the S&P gained 2.0% to 1063 and the Nasdaq clawed back 1.8%.
On this day in 1929, the Dow fell 30 points. Today it seems almost laughable on nominal points that this day is known in history as Black Tuesday. The day before, the Dow fell 38 points, providing a two Black-day total drop of 23% to a DJIA value of 230. While Black Monday provided the bigger fall, Black Tuesday is the day most remembered in history as the capitulation. While volume was heavy on the Monday, so great was the volume on the Tuesday that it was not surpassed as a record until 1968.
The Dow continued to fall another 14% to November, before turning around to provide a 48% rally into April, 1930. It is a rally that many compare to the rally of 2009. Investors will be hoping, however, that history does not repeat. From that peak, the Dow then began an ultimate 90% drop into 1932. No wonder everyone was so depressed.
It was not a case of history repeating last night, however. After four days of weakness which appeared to finally be the basis of a decent correction, the Dow turned tail and rallied 175 points. The reason was simple – the US third quarter GDP figure came out at 3.5%.
The 3.5% growth number followed a 0.7% contraction in June and a 6.4% contraction in March. These are annualised numbers, not quarter-on-quarter movements. Australia reports on a q-o-q system.
The main reason for the excitement was not the nominal value of GDP but its comparison to estimates. While consensus forecasts had been hovering around 3.2% from a week ago, Goldman Sachs prompted nervousness earlier in the week by downgrading its forecast to 2.7%. This became the “whisper number”, as they call it on Wall Street. Thus 3.5% actually looks like a big “beat”. And September breaks the recession after four consecutive quarters of negative growth.
Goldman Sachs is now either looking silly or just wanted to get long at a good price.
The indices simply rallied in a straight line all day following the early market GDP release. The Dow peaked at up 207 before some profit-taking appeared in the last hour. Everything that has been going on in the last few days simply reversed.
The great irony is that a strong economy means a strong currency, unless you’re the US dollar with a zero interest rate making you the risk carry trading currency of choice. After ticking up these past few days to 76.45, the dollar index fell 0.6% last night to 75.99. It was still stronger against the other carry trade currency – the yen – nevertheless.
So it was a simple matter of reversing all that earlier commodity price weakness, which is totally currency related and has nothing to do with demand and supply. Oil was up US$2.41 or 3% to US$79.87/bbl. Gold was up US$19.50 or 2% to US$1046.80/oz. Silver rallied 3%, aluminium 1%, tin 2%, copper and zinc 3% and lead and nickel 5%.
The Aussie gained back all that it lost on Wednesday night, rising 1.8 cents to US$0.9159.
But is it all real?
It seem like a massive turnaround from being down 6.4% annualised in March to being up 3.5% annualised in September. By contrast, UK economists were hoping for a mere 0.2% rise in GDP in the quarter but got negative 0.4% instead. The UK is a shattered shell of a nation, with a central bank forced to keep buying its own government’s debt simply to prevent a further slide into the mire. America does at least produce a few useful things, in contrast, like iPhones for example. And the weakening US dollar has provided a boost to the export sector when the UK and Europe (and Australia?) are struggling with rising currencies on the flipside.
It pays to be the reserve currency, in an obtuse sort of way. The US Treasury has issued extraordinary amounts of debt, lapped up by the world, to finance an unheard of fiscal deficit on top of an almost record current account deficit. That money has been used to provide stimulus, from tax credits to consumers, to tax credits to buy houses, to rebates to buy new cars, to a mortgage securitisation market supported entirely by the Federal Reserve, to a quantitative easing program of Fed Treasury bond purchases.
It appears to have worked. But will it continue to work from here? Can the US economy begin to breathe on its own? Or will we see a feared “double dip” recession?
The consumer hand-outs have long gone. Cash for Clunkers is past history. The new homebuyer credits are set to expire next month. The Fed’s mortgage support program is due to expire in the first quarter next year. And last night, the Fed bought its last Treasury bond. The US$300bn Fed Treasury purchase program has come to a close as scheduled.
Last night the Treasury offered a record US$31bn in seven-year notes, and buying was tepid. This was in stark contrast to the twos on Tuesday, and also lacklustre compared to the fives on Wednesday. Clearly the world will support US spending on a shot term basis, but as we move out into time the desire becomes less robust. The ten-year yield last night shot back up 8 basis points to 3.49%.
The stock market sectors which had led the slide in recent days led the rally last night. Financials had corrected 10% but were up 4% last night. Alcoa – a benchmark of the materials sector – had corrected 20% but rallied back 10%. Interestingly, the total share volume on the NYSE of 1.1bn fell short of Wednesday’s sell-off volume of 1.3bn.
Are happy days thus here again? That’s what they thought in 1930.
It was interesting to note, among the GDP break-down, that US exports did indeed rise 14% in the September quarter. But US imports rose 16% (high oil price would be a culprit). The US is still spending gaily on borrowed money.
The SPI Overnight was up 81 points or 1.8%.
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