Daily Market Reports | Sep 21 2010
By Greg Peel
The Dow rose 145 points or 1.4% while the S&P gained 1.5% to 1142 and the Nasdaq added 1.7%.
I commented last week that the US stock market seemed like it really, really wanted to go up but it just needed some out-of-the-box spark to get it through its 200-day moving average and past technical resistance to actually encourage a rally. Well, it looks like Wall Street found what it wanted last night, at least in the short term.
We know that a recession is typically defined by two consecutive quarters of GDP contraction, but we also know that defining a recession is a look-back exercise. We will be almost through a third quarter before a second quarter's numbers are confirmed to thus confirm a recession has occurred.
But this definition is not the only definition, and indeed much faith is placed in a definition determined by the US National Bureau of Economic Research which uses real GDP, real income, employment, industrial production and wholesale-retail sales among its relevant statistics. And last night NBER declared the recession over.
Well actually, it declared the recession had ended in June 2009, so lagged is the bureau's look-back methodology. This was the month the US economy troughed and everything thereafter has been a recovery. It has not been a recovery back to normal operating capacity, but it has been a recovery nevertheless.
On the release of this news, Wall Street spiked. In spiking, it took out the technicians' resistance level at 1131 on the S&P 500. Having breached 1131, it ran, all the way up to 1142.
Now the obvious response here is: why are we reacting to what is ostensibly 15 month-old news? Well, aside from the fact there are very few players in the market at present and they're ready to latch on to any little thing, perhaps the relief lies more in the detail. NBER noted that the recession lasted from December 2007 and that at 18 months duration it was the longest post-War. The two previous longest recessions were 73-75 and 81-82 both of which lasted 16 months. More importantly, NBER suggested that were the US economy to contract once more from here, it would be a “new” recession.
In other words, there can be no “double-dip” for the simple reason the past recession is long over.
That doesn't mean the US economy can't contract again, it simply implies that that which caused the last recession is put to bed and a contraction from here would be under a new set of circumstances. On the flipside of this argument, of course, are those who say that at 10% unemployment the US has realistically been in recession all this time and has never recovered, which is another reason why there can't be a “double-dip”. Any further downturn would just be more of the same.
Do these definitional vagaries and subtle semantics really make any difference to anything? Nup. But Wall Street liked it nonetheless. And realistically last night's activity was all about technicals, and lack of any real investor interest means technicals and day-trading are all there is to drive the market at present. Last night's NYSE turnover still fell short of the billion mark which means the technical breach did not bring anyone in off the sidelines.
The other point of focus last night was a “town hall” session staged by CNBC for “the people” to quiz President Obama. It could have been the Rooty Hill RSL. Main Street's vox pop response was that it was more campaign speech than policy announcement given Obama largely went over the same old ground. He pointed out just how many various tax concession he was trying to provide for small business, and reiterated that the budget simply could not afford to extend the Bush tax cuts to the top 2% of wealthy Americans. If he could, he would, he said.
So nothing new there, but there is a groundswell of optimism building on Wall Street that even if those high-end tax cuts aren't extended, at least Obama will be forced to bend to Republican concessions when the GOP re-takes the House in November. This is considered to be inevitable and will leave the Democrat Administration without a majority in either house of Congress. And we think our current government looks unworkable.
So all in all there were reasons to be cheerful, albeit not backed up with any conviction. Lost in the wash was the NAHB housing sector sentiment index which remained unchanged this month at an 18-month low. But that's no shock. It is interesting to note we still have a VIX volatility index sitting at the cusp of complacency at 21.5, but as noted on CNBC the volume of put buying last night outweighed call buying by two to one. Those that are buying this market are also buying trailing insurance.
There was little follow-up across other markets with a coordinated “risk trade”. Coordination would imply a sell-off of the US dollar and US bonds and possibly gold, and a rally in commodities. As it was, the US dollar fell only slightly to 81.31 and US bonds were actually bought, sending the ten-year yield down 4 basis points to 2.70%.
Stock markets aside, there is still concern around Japanese intervention, around what the Fed might say tonight in its latest policy statement release (QE2?), around how Beijing is going to respond to its recent strong data, and whether Ireland and perhaps Portugal are still in dire straits. The pressure seems to be off Greece right now, whereas last night Irish and Portuguese bond spreads blew out further ahead of auctions from both this week. The PIIGS are still the rash that just won't seem to go away.
Gold ticked up a bit last night, by US$3.80 to US$1278.50/oz, but the Aussie risk indicator surged. However, this time it was not risk appetite per se that drove the Battler up over a cent to US$0.9474 but an offhand remark yesterday from RBA governor Glenn Stevens that the central bank would certainly raise its cash rate if it had to. The futures market is now calling an October rate rise about a 30% chance and a November rise about a 60% chance.
Oil did respond along with the stock market, rising US$1.20 to US$74.86/bbl, but base metals were unconvinced in London with small but mostly negative moves. The LME wants to see what the Fed says tonight and it is also taking note of the three-day Chinese holiday which begins tomorrow, meaning no Chinese buyers.
Aside from the NBER and politics, Wall Street is becoming increasingly heartened by the pick-up in M&A activity of late. Last night saw several smaller-end takeover bids which all added to a growing pie. One must appreciate that while M&A can be rampant in a bull market when companies are making too much money, it is also prevalent post-recession when the strong pick off the weak from the herd.
The SPI Overnight rose 42 points or 0.9%.
On the matter of Australian interest rates, today sees the release of the minutes of the September RBA meeting which may or may not provide further clues.
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