Daily Market Reports | Jun 02 2010
By Greg Peel
The Dow closed down 112 points or 1.1% to 10,024, while the S&P fell a full 1.7% to 1070 and the Nasdaq gave up 1.5%. The lowest close in the S&P in this downturn to date has been 1067.
Just how much more bad news can this market take? Just how much more bad news could there be? Let's recall the list so far: European debt crisis, forced Chinese slowing, the Australian RSPT, the Goldmans Sachs fraud case, US financial sector reform, the Iceland volcano, the Gulf oil spill, and tension on the Korean peninsula. And now we can add the globally condemned Israeli attack and a warning this year's hurricane season in the Gulf of Mexico could be the most violent in decades.
Of all of the above, arguably the factor that weighed most heavily on market sentiment last night was the oil spill. Oil has been spewing forth for more than a month now, but with the failure of the latest “top kill” solution, the commencement of a new tactic that may initially mean stronger flow, and admissions that it may be August before success is achieved, the potential impact has finally started to hit home. It was also announced last night that the US Justice Department has begun investigating possible cause for either civil or criminal action against BP. BP shares are now down a net 38% and the oil sector in general is weak (particularly last night) as President Obama applies a six-month moratorium on deep-sea drilling that may even be extended further.
Indeed, this Gulf disaster could either set deep-sea drilling back for years, or kill it off altogether.
It could also be years before the Gulf fishing industry is revived, and we are yet to see the closure of Gulf ports or shipping lanes. But now meteorologists have used the “official” first day of the hurricane season to warn that Gulf water temperatures have not been this high since 1948. And that means Katrina may yet be made to look like a zephyr. Throw in a gazillion barrels of floating oil and the extent of possible disaster is not worth contemplating.
It's little wonder global stock markets can't find any reason to rally right now. But global economic data did not exactly help the situation last night either.
Yesterday was global PMI day, in which the monthly purchasing managers' indices for manufacturing sectors in Australia, China, the UK, eurozone and US are released. If one was looking for another reason why global markets were weaker over the last 24 hours, one might considering the following numbers.
Australia's PMI fell from 59.8 in April to 56.3 in May, China's fell from 55.7 to 53.9, the UK's was steady at 58.0, the eurozone's fell from 57.6 to 55.8, and the US fell from 60.4 to 59.7. A pretty dreary result, and one would be forgiven for believing global manufacturing experienced a major slump in May.
But one would be wrong.
It is important to understand just how a PMI works. It is not like a stock price, in that the hope is the number just keeps going higher and higher forever. It is more of a “second derivative” number, in that it measures the rate of growth of a sector – in this case manufacturing – over the month. A reading of 50.0 means activity in the sector neither expanded nor contracted. Anything above 50 means activity is expanding and anything below 50 means activity is contracting. The higher the number over 50, the faster the rate of expansion experienced that month and the lower the number under 50, the faster the rate of contraction experienced that month.
Obviously activity cannot just keep expanding at a faster and faster rate of growth every month, otherwise there would be an exponential effect of manufacturing basically consuming the earth. In reality, activity rates ebb and flow with the economy and seasonal effects. But as long as the PMI comes in over 50, activity is continuing to expand. And that's good news.
Indeed, rarely does a monthly PMI rise above 60 and rarely does it fall below 40. Moreover, the PMI readings across the globe in April represented, in many cases, multi-year highs. So to slip back a bit in May, possibly on funding fears inspired by Europe (or in China's case, deliberate increases in funding cost), but remain above 50 is actually little to be concerned about at all. In fact, all of these PMI results for May are still pretty stellar with the possible exception of China's. But in China's case, the government is forcing manufacturing to slow its rate of growth. Economists had expected a result of 54.0 in China, and it came in at 53.9. The sky is not falling.
The time to worry about PMIs is when the numbers just keep getting lower each month, then fall under 50, and stay there.
Indeed, Wall Street took the US PMI to be a positive result even though it looked upon China's as negative, and even though we know China is being forcefully slowed and may yet be revived again through a policy turnaround if needs be. April also saw a 2.7% rise in construction spending in the US – the biggest jump in nearly a decade.
The truth is that news from offshore had the Dow down 92 points on the open and it closed down 112 points. The disturbing point is that the average was actually up 82 points at lunchtime in response to the above data. It was another late, accelerating sell-off.
The currency du jour (euro) also fluctuated last night, but was 0.5% down to US$1.2233 by the close. The US dollar index rose 0.4% to 86.83, but the Aussie took a bath, down 1.6 cents to US$0.8313 over 24 hours. Was the market expecting a rate rise? Or perhaps weaker manufacturing and building approval numbers were enough. Never mind that retail sales were strong (and economists are questioning the accuracy of the building number).
A nervous LME had a couple of days of news to absorb, but it did fight back on the solid US data, before bottling by the close (two hours ahead of the New York close). All metals were down 2-4%.
Oil is an interesting one at present. BP's failure to stop the oil spill weighed on Nymex and the contract was down US$1.39 to US$72.58/bbl last night. But what happens if it's all over for deep-sea drilling?
Gold remains in favour (the Israeli attack would help) and it was up US$8.90 to US$1225.10/oz.
Amidst all the bad news was some good news last night, at least if you hail from Australia's rival commodity producing nation. Following a couple of quarters of 5-6% GDP growth, the Bank of Canada finally decided to raise its cash rate last night, by 25 basis points to 0.5%, to become the first G7 nation to raise rates post-GFC.
While stock markets don't usually like interest rate rises, if you're coming off the bottom due to strong economic growth it should actually be seen as a good thing. Canada's stock index was nevertheless down 1.6% last night, but only because it tends to follow Wall Street rather closely.
One could be forgiven for wondering why, if Australia and Canada have so much in common, our rate is 4.5% after five rate hikes and Canada's is only 0.5% after one. The answer is that far and away Canada's biggest export customer is the US.
The SPI Overnight fell 44 points or 1.0%.
Watch out today for Australia's first quarter GDP result. Expectation is for 0.4% growth.
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