Daily Market Reports | May 14 2010
By Greg Peel
The Dow fell 113 points or 1.1% while the S&P fell 1.2% to 1157 and the Nasdaq lost 1.3%.
The past week or so has been straightforward enough. The euro has crashed on debt fears sparking a flight to quality which includes buying dollars, US Treasuries and gold and reversing yen shorts, and selling stocks and commodities. The announcement of a US$1trn support package for the euro has supposedly put a safety net under the market, sparking relief rallies in stocks.
But gold has held up given the euro rescue means monetary inflation, while commodities have been less sure now that European economic weakness is expected. Throw in Chinese tightening and the commodity space looks very different to a month ago.
While the euro package should be a safety net, global traders are once again frustrated by a lack of detail. Once again EU members have announced a package of measures in a manner of “policy on the run” before any detail has been decided upon, just as was the case with the specific Greek rescue package. Say what you like about the tardiness of Bernanke and Paulson to respond to the building GFC, but at least they quickly formulated the details of their rescue plans before announcing them to the world, rather than the other way around. And in Europe's case, once again the announced rescue fund still has to be approved by sixteen parliaments, including the German parliament which now has a hostile senate.
Can it be done? Will it be enough? Is the euro now doomed in concept? These are the sorts of underlying questions currently hindering any “back to business” potential across the globe. And it doesn't help that scenes of violent protest in Athens keep flashing across television screens.
In the US, there's even more to consider. Now known a the “flash crash”, regulators are still no closer to connecting specific dots which explain the sudden 1000 point drop in the Dow last week. Mismatched circuit-breakers appear to be a fundamental element but the “fat finger” assumption is just not ringing true either through direct evidence or even possibility given electronic fail-safes built into every trading platform. This has Wall Street still somewhat ill at ease about the integrity of the market, and then on the other hand traders fear an overreaction from regulators leading to yet more stringent restrictions on the free market.
We also had the Goldman Sachs fraud factor earlier on, and more recently a probe into ratings agency Moody's (gee I hope that turns out alright). Morgan Stanley was next to be added to the inquiry list, and as of last night it was announced eight banks are now under examination regarding dealings with ratings agencies and the CDO debacle in general. Financial stocks were thus weaker on Wall Street last night, but this inquiry could go on for months, or years.
What we also had last night was mixed reactions around the globe to the “what do we do now” question. The euro came under selling pressure yet again, but this time the major European stock markets shrugged. London and Germany were up 1%. Commodities, too, decided to stage a technical rally having been heavily sold. Nickel was up 1%, copper and aluminium 2% and zinc 3%. It was the Ascension Day holiday in many centres so volumes were a bit thin.
Wall Street opened weaker from the bell but recovered to the flat-line where it hung around all the way to about 2.30pm just as European markets were winding up. At that point euro weakness stepped up a gear and the currency fell quickly against the dollar to US$1.2531 – just off its previous lows, and just above what the world assumes is the rescue trigger point at US$1.25 (but that is no more than an assumption).
It was a trigger for Wall Street to lose its bottle and tank over a hundred points before the close. Trading volumes were a bit lower last night and the failure to push on with it was sufficient reason to sell again, it seems. It's all part of the great uncertainty.
Despite earlier stability, the daily news hadn't been good on Wall Street. Weekly new jobless claims fell but not by as much as was hoped. Retail leader Kohls posted a disappointing result, and despite Cisco (Dow) having posted a strong result in Wednesday's after-market, a tepid outlook from management, matching similar views from tech and Dow colleague Intel, sparked selling.
After solid demand for three-year and ten-year Treasury note auctions in previous days, the auction of US$16bn of thirty-year bonds was not jumped on. Foreigners bought only 33% compared to the 38% running average. The timing of that auction was also just before stock selling rolled in.
The weaker euro had the US dollar index up another 0.5% to 85.35 but this time gold was not a recipient of the funds flows. Gold fell US$4.50 to US$1232.60/oz suggesting that the mad rush has abated for the moment and the safe haven metal may now need to do some work around this US$1230 level, being the previous high.
So gold last night broke the recent “dollar up and gold up” pattern while base metals defied the dollar. Oil sang to the dollar's song sheet again nevertheless, falling another 1.7% or US$1.25 to US$74.40/bbl.
It was a real mixture last night indicating little more than a limbo period in which neither strong buying nor more further heavy selling of everything seems appropriate.
The Aussie was caught between the dollar and commodities and slipped only slightly to US$0.8953.
After the big rally yesterday, the SPI Overnight lost 51 points or 1.1%. And Friday is, typically, a good day to sell after strength.
There's a big round of economic data in the US tonight, with retail sales, industrial production, business inventories and the Michigan Uni fortnightly consumer confidence measure all being released.
[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]
