Daily Market Reports | Nov 28 2009
By Andrew Nelson
Down down 154 points or 1.5%, the S&P 500 gave up 1.7% and the Nasdaq dropped 1.7% as well.
The short Friday of trade that follows the US Thanksgiving holiday every year is almost always about Black Friday (profits go into the black) , the first shopping day of the Christmas season. But not this year. A closed market yesterday meant Wall Street didn’t have to deal with the fallout caused by news of Dubai’s debt problems, like European markets did, but today’s thinly-traded half-day session saw stocks fall as US investors wondered about the implications.
For the week, the Dow finished just 0.08% lower, but still snapping a three-week winning streak and thus marking its worst week since the one that ended on October 30. The good news is the index is still up 6.15% for the month.
By the time the closing bell rang at 1:00 today, stocks had posted their worst single-session percentage drop of the month, while volatility spiked. The Chicago Board Options Exchange’s Volatility Index (VIX), known by many as the market’s fear index, jumped more than 4% to 24.74. On Wednesday, the gauge had fallen to its lowest level since August 2008, a signal that many took to mean investors were becoming less worried about big swings in the market.
The financial trouble that is now emerging in the Middle Eastern city-state of Dubai is obviously once again starting to spook already rattled investors that were just getting to grips with the emerging signs of a global recovery. Government-controlled Dubai World, the emirate’s largest corporate entity, late Wednesday asked creditors for a six-month stay on debt repayments. Dubai World’s liabilities total around US$60 billion.
The big worry is that a default of over US$60bn in debt payments could have a ripple effect across financial markets around the world, meaning banks that are just starting to lend again will find cause to pull back into their shells. [for more on Dubai see yesterday’s FNArena articles]
Bank of America was the hardest hit stock on the Dow, dropping about 3% and reflecting declines across the financial sector as a whole as investors wondered exactly how much exposure US banks have to Dubai World. Citigroup was also down more than 3%, with the two stocks the most heavily traded on the New York Stock Exchange.
But it wasn’t just banks that felt the pinch, with a 2.6% drop in Alcoa and a 2.1% decline in Exxon Mobil indicative of the tough time the commodities sector also had. The declines across the commodities were due to investors fleeing once again for the safety of the US dollar and Treasuries amidst the turmoil, which in turn saw the US dollar post gains against most major rivals.
Trades that were betting against the greenback in favour of stocks and commodities were quickly unwound, although the trend slowed towards the end of trade as investors reassessed the likely extent of the possible global financial fall-out from Dubai. By the closing bell the dollar index, which measures the greenback against a trade-weighted basket of six major currencies, was up 0.23%, but this was less than half of its earlier highs that were reached before the trading session started. Still, the commodities-linked Aussie was one of the hardest hit, losing 0.8c from yesterday.
Crude futures were about the hardest hit of anything across the trading world, at one point having tumbled 7% to their lowest level in seven weeks. But much like with the US dollar, investors quickly got to grips with the reality post the initial panic and crude for January delivery were down only US$1.70, or 2.2%, at US$76.28 a barrel just after 1:00 local time on the New York Mercantile Exchange. The contract is set to end the week down more than 1%.
The stronger dollar outweighed the flight from risk in the case of gold, which snapped a nine-session winning streak. Gold has traditionally been seen as a safe-haven asset that investors flock to during times of financial and economic turmoil. However, last night its inverse relationship with the US dollar provided the greater influence. By 1:00 New York time, gold had given up US$21.30 an ounce, dropping to US$1,171.40 an ounce after adding more than 7.3% over the previous nine sessions.
In London, base metals ended mixed despite the weakness elsewhere in the commodities space. Basemetals.com reports that an initial price collapse was reversed by bargain-hunting buying and by pre-weekend covering, with half of the complex ending marginally in the black. Copper, tin and aluminium all closed higher, with the other metals finishing above their lows, pushing higher as the US dollar pared its earlier gains.
European markets rebounded Friday as well, with London’s FTSE 100, Germany’s DAX and France’s CAC 40 all gaining at least 1.3% after falling more than 3% Thursday on the news from Dubai. Asian markets tumbled yesterday, with the Hong Kong Hang Seng headlining the declines, down 4.8%.
Yet while financial markets were still dealing with the Dubai news, oblivious shoppers in the US were crawling out of bed in the dark, bellies still full of turkey and stuffing, to take advantage of some blockbuster Black Friday deals that have been being advertised for weeks now. Early reports are pointing to a good start for retailers, with queues longer and carts fuller. Most retailers are expecting to beat last year’s sales numbers, which were admittedly weak. Yet few expect to even come close to 2007 levels, the last good holiday season before the financial crisis hit.
Still, investor reaction so far, despite the early positive indicators, hasn’t been great. Discount retailers like Wal-Mart Stores and Target, which are expected to see the heaviest traffic over the holiday weekend, still saw shares finish mildly lower on the day. Department store chains like Macy’s and Kohl’s are also expected to reap some benefits this shopping season, but investors seemed far from convinced, with shares down around 3.5% and 2% respectively.
Hard sales number from US retailers are expected to start flowing in the next few days and this will not only be the tale of the tape for the US retail sector, but the much anticipated figures will also hold broader implications for the pace of general economic recovery in the world’s consumer driven economic powerhouse.
Australian investors look set to follow Europe, not the US this weekend, having had the extra day to deal with the confidence blow from Dubai. At 9:00 am Sydney time, the SPI was sitting 37 points or 0.8% higher.
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