Daily Market Reports | Apr 07 2010
By Greg Peel
The Dow fell 4 points while the S&P added 0.2% to 1189 and the Nasdaq added 0.3%.
There is little point in continuing to highlight the lack of volume on Wall Street until there is any change in the pattern. Suffice to say, low volatility is keeping the traders away and a return to more balanced portfolios as opposed to equity-overweighted portfolios is keeping the investors away, and this is a new regime which may be in place for a while.
With no economic releases last night and a calm before the storm of first quarter earnings reports which begin to emerge in a week's time, Wall Street drifted in a tight range, seeing little reason to test 11,000 in the Dow. There was, however, keen interest in the release of the Fed minutes of its monetary policy meeting three weeks ago.
The Fed has been at pains to reinforce its mantra that interest rates will remain “exceptionally low for an extended period” because economic recovery is expected to be slow and sluggish. Despite constant repetition, Wall Street continues to speculate on a rate rise every time there's a positive piece of economic data. So this time the FOMC turned its attention to the latest game on Wall Street – trying to determine the length of a piece of string or, in this case, the specific length of an “extended period”. Is it six months? Is it nine?
One might think it would be a case of the bleeding obvious that the FOMC has never had a specific date in mind at which its “extended period” would end, given it is purely based on economic recovery. But this nevertheless had to be pointed out and so the minutes reinforced that the period was dependent on economic performance “rather than on the passage of any fixed amount of calendar time”.
To that end, Wall Street might have suddenly been scared given the most recent economic data have been positive (since the meeting was held) but the minutes were pretty dour on that score:
“The duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further.”
Wall Street bulls have been pointing to a solid economic recovery but the Fed sits in a different camp. The FOMC is concerned that unemployment remains high, concerned about ongoing weakness in the housing market, and surprised that price inflation is as low as it is. In short, the Fed is not looking at much of a recovery at all at this point. But the minutes were quick to point out that were the situation to improve, the “extended period” call would not prevent the Fed acting swiftly to raise the cash rate.
So it was two bob each way, and thus Wall Street had little reason to either buy or sell on interpretation of policy.
By the afternoon session attention had turned to the Treasury's auction of US$40bn of three-year notes. With ten-year yields threatening to break up through the magic 4% figure, stock traders were worried that poor demand for government debt could force the trigger for the Fed to raise rates even as the economy remained weak.
But the auction went off without a hitch, and demand levels were on target with bond trader expectations. This is actually a good result because demand at recent auctions has fallen well short of expectation. Moreover, foreign central banks picked up 52% of the issue – up from the 50% running average and the first time the downward trend has been broken in many months. (Conspiracy theorists – pens at the ready).
The only problem however, for those trying to determine exactly what the global appetite for US debt really is, was that there was another little scare in Europe last night. And it probably made US bonds look a little bit more attractive than they might have done in isolation.
After all the argy-bargy recently about the IMF being part of the stand-by Greek rescue package, which had France arguing with Germany and the ECB arguing with everyone, but which ultimately calmed the markets, Greece has now baulked. The government knows that with the IMF comes very tough austerity measures, and it is concerned that it would not be able to control a resultant level of civil unrest.
It is also baulking at the sort of interest rates the EU members would require in a bail-out as part of their participation. And the fact that the Greek government is raising these issues now, instead of when a bail-out is actually needed, would tend to suggest only one thing – the Greek government is readying itself for bail-out. It has just too many bonds to sell to finance its deficit and no one much wants to buy them.
As to whether the global market really wants to buy US bonds, well tonight's US$21bn auction of the benchmark ten-year notes will be indicative.
The news from Greece sent the euro lower last night, forcing up the US dollar index. The pound was also weaker as Prime Minister Brown officially set the UK election date at May 6 and the City absorbed the lastest polls which still point to a hung parliament. The dollar index rose 0.3 of a percent to 81.37.
There was little movement in commodities prices nevertheless, mirroring a lack of volatility in stocks. Gold rose US$2.50 to US$1134.00/oz and oil rose US22c to US$86.84/bbl.
Base metals were back on in London after the Easter break and while copper added 1% to sit just below US$8000/t, and lead had a 4% jump, the rest of the complex was mixed.
The Aussie has jumped over half a cent in twenty four hours to US$0.9284 due to yesterday's rate rise.
The SPI Overnight was up 6 points.
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