Daily Market Reports | May 12 2010
This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA
By Greg Peel
The Dow closed down 36 points or 0.3% while the S&P lost 0.3% to 1155 but the Nasdaq was a squeak stronger.
While European stock markets pulled back a bit last night following their huge runs on Monday, selling in the euro resumed in earnest. It's a bit of a lose-lose situation for the euro now – either the market can be sceptical about actually preventing debt default by Greece and others or it can simply look at the sheer volume of euros which will need to be printed to prevent such default.
The euro fell over 1% against the US dollar to US$1.2638 and close to 2% against the yen. The pound managed a rally nevertheless as David Cameron was sworn in as prime minister following Gordon Brown's ritual suicide. The Tories will now attempt to form the first coalition government since WWII, and what interesting bedfellows will be co-allied. One can only presume the conservative Tories and the socialist Lib-Dems will struggle to agree on any measures required to drag the UK back from the brink.
But that will be a story for another day. In the meantime, the dollar index rose 0.4% to 84.62 with its role as the only viable reserve fiat currency now ratified by the euro's demise. What is interesting about currency movements in the last month is the breakdown of relationships which prevailed over the whole GFC. The euro-yen used to be a risk indicator (risk increasing if it fell) and the US dollar index would rise on risk and fall on relief. Now that the euro is systematically weak, those relationships are no longer quite viable.
It is also interesting to note that the budget deficit to GDP ratio of Greece – that which started all this off – is also that of the US, federally. Throw in state, municipal and agency debt and the US deficit is much worse on percentage terms. Throw in corporate and household and…never mind. But what all this adds up to is the fact the only viable reserve currency is backed by the world's historically largest amount of debt – debt that never will be, and is never intended to be, paid back. It is only ever intended to be serviced.
But on that basis, there is one reserve currency left that has no debt issues – just supply issues, and those are weak. It is thus of little surprise that once the dust settled over the announced euro “TARP”, gold took off again. Last night it added 2.4% or US$28.70 to US$1231.40/oz, a new high. Silver – the schizophrenic precious metal – rose 4.5%.
If the euro is facing a lose-lose, gold is now facing the opposite win-win. If the eurozone does indeed break down and the euro becomes non-viable as a currency, then gold is a hedge. If the eurozone continues on, backed by hundreds of billions of freshly printed euros, then gold is the hedge against monetary inflation. And because the US owns more printing presses than anyone else, gold is also safe against the US dollar. The US dollar index might be stronger now, but that only reflects global relativities of economic strength and indebtedness. In other words, the converse relationship between US dollar gold and the US dollar is no longer strictly applicable either.
Another interesting point to note, in gold's favour, is that the yellow metal had been losing its lustre as an inflation hedge against “real” commodities these past years, largely driven by easier access to direct investment in commodities. Gold is not a consumable, it is simply a store of wealth. Oil, on the other hand, is the world's most “valuable” commodity, and so it makes sense to buy oil as a price inflation hedge and even, perhaps, as a monetary inflation hedge. But over this past week or so, oil has lost 10%. (Oil fell US43c to US$76.37/bbl last night.) At the end of day, if global economic growth forecasts are reduced post the eurozone crisis, oil demand is also reduced.
The same can be said of base metals, which last night fell a fairly uniform 1-2% (zinc 3%) in London.
Adding to commodity demand fears was yesterday's monthly round of Chinese economic data. Ironically, the better than expected results caused the Australian market to sell off in defiance of the big Wall Street gain on Monday. Previously, positive Chinese data would have garnered the opposite response. But now the world appreciates that every time the Chinese economy appears to grow too strongly, Beijing is going to try to slow it down with tighter monetary policy measures. Thus a strong China now means weaker stock markets.
The Chinese data were no doubt on the mind of Wall Street traders as they sold from the opening bell, sending the Dow down 100 points. Mind you, after the 400 point rally the day before this was no great surprise. But those who were too slow to move on Monday saw an opportunity, and buying took the Dow to up 90 points by 2pm.
The selling resumed once more thereafter, and we slid to a close of down 36. But the bulls will always take a mere down 36 after a huge 400 rally as a positive sign.
There were also positive data released in the morning to spur on the buyers. Wholesale inventories rose 0.4% in March which was just shy of expectation, but wholesale sales soared 2.4% to almost double expectations. This is a big positive (assuming accurate figures) because sales are outpacing inventories, meaning more products need to be produced to catch up and that means economic growth.
There was also positive news from the bond market, albeit hardly surprising given the reserve currency discussion above. The US$38bn auction of three-year Treasury notes was well subscribed and foreign central banks bought 51%, up from the recent rolling average of 48%. The benchmark ten-year yield was little changed at 3.52%.
The stronger US dollar and weaker commodity prices had the Aussie falling again last night, down 1% to US$0.8942.
The SPI Overnight rose 20 points or 0.4% following the sizable dip in the physical yesterday.
I watched the Budget speech last night and my only take-out was “no surprises”. I'll leave the extensive analysis to those more qualified, or at the very least those down in Canberra yesterday for the media lock-in.
We will see home loan and investment lending data in Australia today, along with a quarterly update from CommBank ((CBA)), a full-year result from CSR ((CSR)) and the same from SP Ausnet ((SPN)).
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For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA
For more info SHARE ANALYSIS: CSR - CSR LIMITED
For more info SHARE ANALYSIS: SPN - SPARC TECHNOLOGIES LIMITED