Daily Market Reports | Sep 23 2010
By Greg Peel
The Dow closed down 21 points or 0.2% while the S&P lost 0.5% to 1134 and the Nasdaq fell 0.6%.
The immediate reaction on Tuesday night to the Fed's monetary policy statement was an 80 point Dow pop as fools rushed in in anticipation of more QE support, before the angels had no fear in treading on them. The Dow closed sightly down.
Last night was a Wall Street session which tailed the world's response to the prospect of QE2 – a prospect made as good as certain now that the Fed is specifically targeting low inflation and not just serious economic deterioration. For the stock market, it was a case of what can we do here? Wall Street is on track to post its best September in more than 70 years. The Dow has been up in 12 of the last 14 sessions, but still the Fed feels the system needs more Monopoly money to support it.
More money in the system is a good thing prima facie – it's stimulatory – but underlying the Fed's plan of attack is the obvious implication that the US is facing destructive deflation which undermines investment returns. So right at the moment the stock market has found a new limbo, with the S&P sitting just above its technically significant level of 1131.
Tech stocks nevertheless took the brunt of selling last night. I noted yesterday that Adobe had released very disappointing guidance with its after-market result, and Adobe shares were slashed 19% in last night's session. Microsoft announced an increased dividend last night, as flagged, but it was not as good as was expected.
The response in other markets has not been quite so vexed. In short, the US dollar is toast.
The dollar index fell another 0.75% last night to 79.80 having fallen 1% on Tuesday night. Technically, the index has now broken down through its 200-day moving average and is facing a “death cross” as the 50-day moving average prepares to drop through the 200-day. The dollar is falling simply because there will soon be a bigger supply.
The US dollar could be even weaker, were it not for Bank of Japan intervention which is preventing the yen from rising further. The dollar could actually be stronger if the Bank of England had also decided to increase its quantitative easing program, but it hasn't. The minutes of the last BoE meeting were released last night and indicated, however, that some board members are pushing for more QE. The dollar could have been stronger if European sovereign debt issues were once again a problem, but this week all of Greece, Ireland and Portugal have found solid enough demand for bond auctions, albeit at increasingly higher interest rates.
So the euro is now up near US$1.34, having briefly fallen below US$1.20 in the early-year mayhem. That's a 12% appreciation. Yesterday the Aussie threatened to conquer US$0.96, but the mayhem there soon settled down and the Aussie is only up slightly over 24 hours to US$0.9567.
Wall Street is now focused on signs of deflation which would trigger QE2 from the Fed. Last night the Federal Housing Finance Association representing agency mortgages (the vast majority of all US mortgages) noted average prices of agency-mortgaged houses fell 0.5% in July, and are down 3.3% year on year to the lowest level in six years. Foreclosures and delinquencies continue to rise. And they will continue to rise until any meaningful headway is made on US unemployment. So drastic is the foreclosure problem in some states that state governments have moved to freeze foreclosures.
While house prices fall into the category of asset price deflation rather than CPI inflation, it's still deflation.
I noted yesterday that the LME had closed before the release of the Fed statement, so last night provided the first opportunity for base metals to react. And react they did, with nickel and tin up over 1%, copper, lead and zinc over 2% and aluminium 3%, simply on the weaker US dollar.
Gold surged merrily on, as one would expect, rising another US$4.40 to US$1291.20/oz. There may be some timidity here as gold approaches the 1300 mark, but if it breaks, watch for the taxi drivers to come pouring in.
While oil should also be stronger on a weaker dollar, there is little excitement in the oil pit now that deflation appears the major problem. Oil was down US26c to US$74.71/bbl on the new front month of November delivery. But oil has been stuck in a range between 70 and 80 over the last sixth months and does not look like breaking out either way. Deflation caps the upside and a weak dollar caps the downside.
The SPI Overnight fell 14 points or 0.3%. Wall Street influence aside, the ASX 200 is now hitting its own headwinds as the Aussie keeps rising.
It is also important to note that the next move up in the cash rate takes us into “restrictive” territory. Typically stock markets do not like interest rate rises because they crimp investment capacity and discount future earnings. However, the RBA rate hikes from the emergency level of 3% to today's 4.5% were a response to a recovering economy. Each step was still within the “accommodative” range so the stock market was still happy to respond positively. At 4.5%, the RBA declared the cash rate to be back to “normal”.
So all the hikes so far have been to rein in emergency funds lest the economy (and inflation) run amok. But now the Australian economy has not only recovered, there are inflationary pressures building driven solely by the terms of trade. Any hike from here is thus a deliberate attempt by the RBA to slow the pace of growth, just like Beijing's been trying to do. Thus any hike from here is now a headwind for the stock market.
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