Daily Market Reports | Dec 18 2009
By Greg Peel
The Dow fell 132 points or 1.3% while the S&P fell 1.2% to 1096 and the Nasdaq fell 1.3%.
When the Fed issued its latest monetary policy statement on Wednesday night, the US markets were not quite sure how to react. In truth, absolutely nothing changed. The Fed reiterated it would hold its cash rate near zero for an extended period, and it specifically restated its timetable for the withdrawal of various quantitative easing measures, being at specific dates in February, March and June next year. These dates had already been set, but the Fed realised it needed to end speculation in the market that exit strategies would be moved forward, ahead of a rise in the cash rate.
One might assume the Fed statement would thus be negative for the US dollar, which had been rising on anticipation of an cash rate rise sooner rather than later. Immediately after the Fed release, the dollar spiked up but then fell back again. However, taking a step back to look at the macro, what the Fed is saying is it will be shutting down various rooms full of printing presses beginning early next year. The Fed has already wound up its US Treasury bond buying program, and its various other assistance facilities are soon to be wound up as well. Given the money needed for these programs comes from the Treasury in the first place, the end of such programs means no more “funny money” is being printed. The US Treasury will from then on simply be relying on bond sales to fund the deficits.
So the simple maths is: less supply of dollars, higher price for dollars. That’s the way the world was looking at it yesterday, after New York closed, as slowly the US dollar started to rise in Asia and then in Europe. By the time New York opened last night, the dollar index was already much higher. It peaked at lunch time at 78.00, up well over 1%, before falling back in the afternoon to 77.73.
And we also recall that currency trading positions are set very short US dollars, thus sparking sharp short-covering rallies at the first sign of dollar strength. And there was a double-whammy effect last night, given just as the world was absorbing the ramifications of a drop in the supply of dollars, Standard & Poor’s came out and downgraded Greece’s sovereign debt from A minus to BBB plus. The downgrade follows a similar move by rival agency Fitch just over a week ago.
Just when Wall Street starts to shrug off sovereign debt issues on the other side of the world, they re-emerge to cause anxiety. The problems of Iceland and Ireland in 2008 are now long forgotten, but Dubai suddenly swung the spotlight back to sovereign issues last month. Then came Greece, followed by a negative watch for Spain and concerns over Portugal, and then the Austrian government was forced to nationalise a bank. But Wall Street still pushed on to new highs, before stumbling again on a sovereign debt reminder.
Wall Street opened weaker last night and held the same losses for most of the day until a late drop. Weakness was indiscriminate. It was not a great day for banking giant Citigroup to try to get away US$20bn in new capital. In mid-October, Citi shares were trading at US$5.00. They have been falling steadily ever since, and the new issue was priced at US$3.15 in an attempt to be settled. Citi shares were down another 7.5% last night to US$3.19, with questions being asked as to whether the bank will actually find enough buyers.
If buying Citi shares is a risk trade, the simple reality of a rising US dollar is the unwinding of risk positions both domestically and internationally which have been funded with dollar borrowings. Anxiety over Greece is the sort of scare that frightens investors into unwinding these “carry trades”. We used to spend our time worrying about positions in the yen carry trade, but now the dollar is the carry trade currency of choice.
Not helping was a December quarter earnings guidance downgrade from FedEx. The shipping company is considered a good bellwether for the state of the US and global economies, and its shares fell 6%.
And nor did an unexpected rise in weekly new jobless claims – up 7,000 – help the mood.
There was good news however, albeit somewhat lost in the wash. The Philadelphia Fed manufacturing index rose in December from 16.7 to 20.4, indicating the Philadelphia region is doing okay even if the neighbouring Empire State (NY) region is not. The Conference Board leading economic indicators index rose for the eighth consecutive month, up a better than expected 0.9% in November following a 0.3% rise in October. The leading index provides a crystal ball as to what economic growth might be in the next 3-6 months.
But an impending fall in the supply of crisp new US dollars undermines the value of gold as monetary inflation hedge. The big bounce in the dollar subsequently sent gold tumbling US$33.20 to US$1100.60/oz. I suggested a while back gold will probably want to trade back down to its India break-out level below US$1100, after its blow-off top over US$1200, and that appears to be the case. Silver matched gold with a 2.8% fall.
US Treasuries were nevertheless a safe haven of choice. The US ten0year bond yield fell 10bps to 3.49%.
Oil did not go the same way as gold. Having initially fallen on dollar strength, oil rebounded in sympathy with is natural gas cousin. The US is suffering through an unseasonable cold snap at present (just as Barack Obama flies out bound for Copenhagen) and last week’s natural gas drawdowns were the highest on record. The natgas price jumped 5.6% last night in defiance of the dollar, turning crude oil around.
Base metals copped hiding in London nevertheless on the dollar’s strength. Aluminium, copper, lead and nickel were all down 2%, and zinc 1%.
The Aussie was already being sold off in the Asian session yesterday as buyers moved into the greenback. Over 24 hours it is down close to one and a half cents at US$0.8868.
The SPI Overnight fell 32 points or 0.7%.
Three big Nasdaq-listed tech names issued quarterly profit results after the bell. In what might assist a recovery tonight, all things being equal, database specialist Oracle and fruiterer Research in Motion posted better than expected results while pilot Palm slightly disappointed. Palm shares are down 1.2% in the aftermarket but Oracle shares are up 4% and RIM shares up 12%.
Note that tonight in the US is “quadruple witching”, in which stock options, index options, stock futures options and index futures options all expire together. This event may also explain some of the volatility last night, so tonight could be fun as well.
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