Daily Market Reports | Sep 15 2010
By Greg Peel
The Dow closed down 17 points or 0.2% while the S&P lost 0.1% to 1121 and the Nasdaq rallied 0.2%.
On any given overnight session across the globe it is usually straightforward to see how the pieces of the puzzle fit together – to understand relative movements in all of stocks, bonds, commodities and currencies. Last night, however, a confusing muddle was the end result. We might start by noting the Dow was down 45 at 10am, up 45 at midday, square at 2pm, up 40 just after 3.30pm, and down 17 at the close.
Ahead of the bell, Germany had announced that its monthly ZEW survey of analysts and institutional investors showed a drop in the sentiment index from plus 14.0 to minus 4.3. That's the fifth month of falls but the second in a row which has gone against economist expectations.
Yet one might argue that the result is no shock. Europe is in the grip of forced austerity measures, sovereign debt issues still hang as a threatening cloud, and while a weaker euro provided a boost for German exports earlier in the year, the euro has now recovered substantially.
One might assume the euro would then fall on the ZEW result, but instead it was up 0.9% to US$1.30. Any weakness suggested was actually swamped by selling in the US dollar.
The selling in the US dollar was sparked by the release of the monthly US retail sales results, which showed a rise of 0.4% compared to expectations of 0.3%. This was the second consecutive gain and the biggest jump since March. Sales ex-autos rose 0.6% compared to a 0.4% expectation.
It was supposedly another nail in the coffin of the double-dippers. And the retail sales release was backed up by the release of July business inventories and sales, which showed gains of 1.0% and 0.7% respectively, also ahead of expectation. While inventory growth remains ahead of sales growth, the gap is not yet widening.
If the US economy is not going to double dip as previously feared, then logic would assume that's a positive for the US dollar. But that's not how it works in today's world. With a cash rate near zero, the greenback is the carry trade currency of choice into risky asset investment. Good economic news thus means US dollar selling, and last night the dollar index was down another 0.8% to 81.21.
Weakness in the dollar was supported by another new 15-year high in the yen – the previous carry trade currency of choice. The risk currency of choice – the Aussie – jumped another 0.4 of a cent to US$0.9396.
Strength in the Aussie implies strength in commodities and commodity producers. But investors be warned that pretty soon stock analysts are going to upgrade their 2010 average Aussie dollar forecasts, and resource stock earnings forecasts are going to be downgraded as a result (unless commodity price and volume forecasts are equivalently upgraded, but that's all up to China).
So the currency movements are telling us that last night the world was embracing risk again. But such an embrace would usually translate into gains in stocks and commodities and falls in bonds and other “safe haven” assets.
Yet the US stock market was slightly weaker, and the US ten-year bond yield fell another 7 basis points to 2.66%, meaning bonds were heavily sought. And while gold will find support in a weaker US dollar, easing fears of a US double-dip might otherwise restrain that buying. Yet last night gold jumped US$23.70 to a new record nominal high of US$1268.70/oz.
Why? Well on the bond front, the suggestion is the ten-years were sold too sharply earlier in the month on “bond bubble” fears and that the buyers are still happy to support low yields rather than try their hand in the stock market. But then there was also a report out last night from Goldman Sachs.
Goldman Sachs speculated in its report that the Fed would be forced to step up its quantitative easing (meaning kick start QE2) as early as November with some US$1 trillion of fresh Treasury bond purchases to reinvigorate the post-stimulus economy. This is not a lone opinion in the woods, but recent more positive economic data have suggested the Fed might not need to intervene, given the Fed has stated it would only launch QE2 were conditions to “deteriorate appreciably”. Last night's retail sales result adds to the positive data.
A cynic might suggest Goldman Sachs actually runs the US Treasury, and either way such speculation in isolation would be enough to send the US dollar south and gold north on monetary inflation fears.
What do “real” commodities do amidst all this? Square up mostly. Oil was down US39c to US$76.80/bbl following strong recent gains, and base metals were mixed on relatively small moves in London also following a bit of a surge.
So how does one put all this together?
The S&P 500 is now sitting at its 200-day moving average once more following a good rally – a level it has failed five times to breach since May. Volumes remain pathetic. While a double-dip may not seem as likely as it did a month ago, investors are still favouring bonds over stocks. There remains a sufficient interest in emerging market investment (with the Aussie as a proxy for such) but there also remains a great deal of uncertainty. Double-dip or not double-dip, the speculation is that the US will have to re-stimulate, both fiscally and monetarily, to have any chance of reducing unemployment. Add it all up, and gold seems like the safest and most sensible place to be.
The SPI Overnight lost 10 points or 0.2%.
It's consumer confidence day in Australia today and industrial production night in the US tonight.
[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.]
