Daily Market Reports | Mar 25 2010
By Greg Peel
The Dow fell 52 points or 0.5% while the S&P fell 0.6% to 1167 and the Nasdaq dropped 0.7%.
In European news: German government officials were forced to reject the notion last night that the reason Chancellor Merkel is resisting an EU-only Greek bail-out (she prefers IMF help given Germany would need to stump up the most in an EU bail-out) is because of an upcoming state election. Were Merkel's party to lose the state of Westphalia on May 9 it would lose control of the upper house. The German electorate is bitterly opposed to using German taxes to bail out Greek profligacy.
Credit ratings agency Fitch last night downgraded Portugal's long bonds from AA to AA minus in light of Portugal's failure to rein in its runaway budget deficit. Fitch warned further downgrades would follow if Portugal did not get its act together. Earlier in the year the Portuguese government did offer an austerity bill to parliament but it was voted down. Again the electorate is calling the tune.
Facing an election on May 6, Britain's Chancellor of the Exchequer last night brought down a budget which would trim the Britain's public debt to GDP level from a previously forecast 12.7% of GDP to 11.4%. He also lowered the Exchequer's GDP growth forecast for 2011 from 3.5% to 3.0%.
To put things into perspective, Greece's debt to GDP is 13%. Portugal's is 9.3%. Britain's is 11-12%? Hello?
In US bond market news: The ten-year swap spread flipped from positive to negative last night for the first time ever. I will not attempt to explain this in one short paragraph, but suffice to say a wave of recent corporate bond issuance (US$93bn this month alone) as US companies desperately attempt to take advantage of lower post-GFC credit spreads is behind the flip. Traders view the inversion as an indicator that the massive supply of US Treasury debt is set to drive yields higher (bond prices lower).
And that's exactly what happened last night. A US$42bn auction of US Treasury five-year notes was poorly received, sending yields soaring across the curve. The benchmark 10-year bond yield leapt 17 basis points to 3.85% in the biggest single move since July. Foreign participation in the auction fell to 40% from its running average of 50%. Tonight sees US$32bn of Treasury seven-years on offer.
The upshot of all of the above was that the US dollar index last night jumped a huge 1.35% to 81.91. It was a double-whammy between weakness in the euro and pound and a weak Treasury auction suggesting the Fed will need to raise rates to continue to fund the deficit.
The irony is that while higher rates imply stronger dollar demand, any rate rise to attract funding has nothing to do with economic growth – the other reason why you'd raise rates. Last night it was revealed US new home sales fell to their lowest level ever in February.
The 2.2% drop was greater than economists predicted. Clearly February's snow had a lot to do with it, but February marked to fourth consecutive month of declines since the government's stimulus measures were downgraded. Economists had also predicted a 0.6% increase in new durable goods orders in February. The 0.5% result was a slight disappointment but it did mark the third consecutive gain. However big-ticket aircraft orders again played a big part.
The surge in the US dollar was never going to be good for commodity prices, and gold in particular. The US$1100 support level finally gave way as gold plunged US$19.80 to US$1085.70/oz. Half of Europe is threatening to go under and monetary inflation is becoming very real in the US, but still they sell gold.
This is the usual course of things, as the short-term traders respond to the mathematical influence of the US dollar's appreciation. Longer term gold bulls tend to hold back and allow such episodes to play out before moving in again.
Base metals copped a hit in London with tin down 0.5%, copper and nickel down 1%, zinc down 2%, aluminium 2.5% and lead 4.5%.
Oil copped a double-hit on both the US dollar and news that last week crude inventories rose by four times more than analysts were expecting. Only a decline in gasoline inventories prevented a bigger fall in the oil contract than US$1.30 to US$80.61/bbl.
With all of the above, one might conclude that a fall of only 50 in the Dow was actually a good result. The truth is that while everything around the stock market is going haywire, the stock market remains in creep-up mode. Resistance was provided last night via various means – three big IPOs were put away, alleged coffee-maker Starbucks announced it was ready to offer its first ever dividend, Bank of America shares jumped on news the bank was offering US$3bn in “loan forgiveness” in order to stem a rush of mortgage foreclosures, and shares in large home-builder Lennar jumped on a reported loss which was not as big as expected.
The stock market bulls continue to point to improved earnings, dividends returning to normal, share buy-backs, successful corporate bond issues, IPOs and M&A activity all being signs of a market heading to higher ground by year-end.
The Aussie plunged 1.2 cents last night to US$0.9073.
The SPI Overnight was down 13 points or 0.3%.
Watch out today for the RBA's biannual financial stability review.
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