Daily Market Reports | Dec 19 2009
By Greg Peel
The Dow closed up 20 points or 0.2% while the S&P added 0.6% to 1102 and the Nasdaq jumped 1.5%.
The day began with the US dollar index falling back to 77.38 following its surge to 77.73 on Thursday, as the stock market saw strength on the open led by the tech sector. This was a response to the strong after-the-bell earnings reports from tech leaders Research in Motion and Oracle on Wednesday evening. The Dow quickly added 60 points.
The mood quickly changed when news reports hit the wires that Iranian forces had seized an oil well inside the Iraqi border. The ensuing panic saw the Dow fall over 100 points from its high and the dollar index rush up to 78.15 as investors again sought a safe haven. But the dust soon settled once the story became clearer.
Some 300km south-east of Baghdad there is an oil well located 300m inside what is a disputed border between the two longstanding enemies. Rightful ownership of that well is thus also disputed, and Al Jazeera reports that last night eleven Iranian soldiers crossed the border and took control of said well. The Iraqi government called an emergency meeting, and decided it would attempt to resolve the issue through diplomatic channels. There was no word from Tehran.
But as it turns out, this happens every few months. Iranians run in, stick up an Iranian flag and claim ownership for a while before becoming bored and going home again. Then the Iraqis come back, stick up an Iraqi flag and everything’s back to normal for a little while until the cycle repeats. Al Jazeera thus implies the whole thing is a storm in a tea cup. But such news is still enough to give Wall Street the jitters.
Outside of geopolitical shenanigans, the focus was on “quadruple witching”. This occurs when quarterly stock, stock futures, index and index futures contracts all expire together, causing holders to sell, exercise or roll their positions, causing some to try and push prices over the strike price, and causing market-makers grief as they attempt to balance out their exposures and not be stuck with stock they don’t want. The end result is often volatility on the day, but always a big surge in volume which is unrelated to specific market direction.
Just to add to the fun, it was also an S&P 500 index rebalancing day, on which there are offcial promotions and relegations of companies to and from the index, and on which weightings are adjusted for secondary capital issues occurring since the previous rebalance. Given the wealth of secondary issues recently, there was a lot of adjusting going on. Index-tracking funds have to buy/sell stocks to reweight their own portfolios to match the new index weightings, all of which again adds significantly to volume, but has no bearing on sentiment.
By day’s end the S&P 500 was a bit stronger following all the to-ing and fro-ing, the Nasdaq was much stronger due to the influence of the solid RIM and Oracle results, and the Dow was little changed. With expiries out of the way, there’s little incentive to do much now before January. The dollar index also returned pretty much back to where it started at 77.75.
The Aussie rose slightly to US$0.8902.
Oil naturally responded to the Iranian situation, and finished up US71c to US$73.36/bbl. Gold bounced back somewhat following its big fall on Thursday, adding US$11.50 to US$1112.10/oz.
Your correspondent well remembers the day in 1990 when, having vainly fought the Iranians for ten years in order to secure direct access to the Persian Gulf, Iraq decided to invade Kuwait instead. Back then, the price of gold soared in its role as the geopolitical safe haven. While gold still wears such a hat to some extent today, the “safe haven” of choice is currently the US dollar. The words “safe haven” are a bit of a furphy here though, because realistically as the dollar is the carry trade currency of choice, sudden panic means a reversal of risk trades and thus a reversal of dollar funding. This means dollars are bought, making the reserve currency appear like a safe haven. The stronger dollar puts a price dampener on any gold demand.
London base metals did very little last night.
The SPI Overnight was up 16 points or 0.3%.
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