Daily Market Reports | Aug 31 2010
By Greg Peel
The Dow fell 140 points or 1.4% while the S&P lost 1.5% to 1048 and the Nasdaq dropped 1.6%.
Was it just a dream? Friday on Wall Street saw a rally driven by a less bad than expected GDP revision and more soothing words from Uncle Ben. But the reality is that while some traders may have been hoping they were picking up oversold stocks at a good price, it was really a thin-volume rally driven by a brief short-covering scramble. Or in the case of bonds, a long-covering scramble.
So it was a case of squaring up for the late summer weekend before getting back down to business on Monday. And looking out across the week's economic data calendar, all that traders can see is the potential for a whole new raft of ever weakening numbers. The manufacturing PMI will be crucial on Wednesday, but the biggie is the jobs report on Friday. Weekly jobless claims numbers have not been good this month.
So we were back to normal programming. There was a potential for the rally to kick on if only more soothing words were forthcoming. On Friday Wall Street took solace from the “we stand ready” statement from Ben Bernanke, even though he said nothing new. Last night there was potential for fiscal policy to back up monetary policy, but President Obama managed only to deliver a tepid assurance that his Administration was discussing possible re-stimulus measures. Maybe extending the tax cuts, maybe this or that, dunno.
Obama is clearly hamstrung by the approaching mid-term Congressional elections in which the Republicans appear near certain to regain the balance of power, provided it doesn't fracture itself into warring factions of centre-right incumbents and further-right God-fearing, flag-saluting Tea Party loonies. If Obama were to announce further socialist spending measures, America will shift right. If he extends the Bush tax cuts, he risks disenfranchising his lower class supporter base.
The bizarre factor to consider, nevertheless, and one which has been raised by many a commentator, is that of the US$787bn stimulus package instigated by the former Administration in 2008, once known as the TARP, over US$200bn remains unspent. Furthermore some of the bail-out funds to banks have been returned, and GM is about to list again. Obama could announce something – anything – that would provide direct job stimulus for example without actually going further into debt. But the Administration seems frozen into indecision.
History shows that while recessions often lead to a change of government, it's most often a hospital pass. And short-lived.
Aside from a lack of announced action from Obama, last night's weakness was driven by the monthly personal income and expenditure data.
Incomes rose 0.2% in July while spending increased by 0.4%. Economists had expected a pair of 0.3s. Savings retreated from the 2010 high of 6.2% to 5.9%. On face value, that all looks okay, but the problem is these are dollar figures which must be adjusted for inflation in order to determine a clear picture.
In real terms, spending rose 0.2% in June, but this measure includes lumpy durable goods purchases and July featured a gain distorted by aircraft. Incomes actually fell 0.1% – the first fall since January. What does a deflationary environment feature? Falling prices and wages.
There was also disappointment in currency markets. The Bank of Japan called an emergency meeting yesterday which the world assumed would conclude with central bank intervention to curb a soaring yen. Instead the BoJ decided to attack the yen internally by announcing further quantitative easing measures. QE is the equivalent of a cash rate cut when there's no rate to cut (BoJ rate currently 0.1%) and should weaken a currency on the basis of greater supply – that is, printed banknotes.
This move sparked nothing more than a groan from forex markets and the yen shot up again. But the euro and the pound are back in a downward drift as concerns begin to rekindle that a sovereign debt default is looming as an inevitability despite the as yet un-consumed EU/IMF bail-out fund. The US dollar index thus rose 0.5% last night to 83.17.
The stock market turned around to retrace Friday's rally last night, and the bond market turned around to recover most of Friday's lost ground. After rising 17 basis points on Friday, the benchmark ten-year yield fell 12 basis points last night to 2.53%. The bond market is simply telling the world “we expect the US in the 2010s to resemble Japan in the 1990s”. Deflation makes real bond yields greater than nominal bond yields while stock markets drift lower.
The Aussie also turned around and went back the other way last night, losing 0.7c of its 1.2c Friday gain to end at US$0.8921. Gold slipped US$1.70 to US$1236.40/oz on the stronger dollar, but gold is now sitting in wait for both the beginning of the Asian jewellery season and the eventual announcement that the QE2 has set sail, which many in the market now assume to be only matter of when, not if.
The UK had its bank holiday last night so the LME was closed. In a thin market, Comex copper futures added 1.3% in defiance of the dollar. Oil nevertheless fell US47c to US$74.70/bbl.
The SPI Overnight fell 54 points or 1.2%.
Sound the trumpets, bang the drums, crack the champagne – today is the last day of the Australian reporting season. Now we can all get some rest. What this means, however, is that there will be a bit of an information vacuum for a while before the end of September heralds the slow beginning of the AGM season. We will also see a large amount of stocks going ex-div over the next couple of weeks which will nominally impact on the index. Thereafter, stocks held to the death to collect the dividend may well be sold in this currently weak environment.
Tonight sees the release of the minutes of the last Fed monetary policy meeting. Will there be any further QE2 clues?
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