Daily Market Reports | Sep 27 2010
By Greg Peel
Wall Street is becoming more and more ridiculous by the day. One might call it a bit chicken and egg, on the basis that because there are no real investors in the market intraday volatility is over the top, or that because intraday volatility is over the top there are no real investors in the market.
To pick up on a couple of themes from last week, I noted that back in the boom days a fall of 100 points in the Dow would imply some shock to the market akin to a nuclear bomb going off. Maybe a tad hyperbolic, but then what would a 200 point rally imply? That the US government had just abolished capital gains tax?
But we had a 200 point rally on Friday night (Dow up 197 or 1.9%, S&P up 2.1% to 1148) on a couple of pan-Atlantic monthly data releases that in previous times would have slipped right under the radar. Sure – intraday volatility has become the norm post-GFC and we've had the odd 200 point rally before, but right now the headless chooks are simply running back and forward in the barnyard on the slightest provocation. Anyone trying to read meaningful direction into recent activity may need to have their own head read.
Before the session opened on Wall Street on Friday the market learned that a monthly German business sentiment index had risen against expectation and that the fall in monthly US durable goods orders was not as bad as had been expected. Must have been significant to spark a 200 point rally huh? Well the Munich Ifo index rose to 106.8 from 106.7 last month when economists had expected a fall to 106.5, and durable goods orders only fell 1.3% when a fall of 1.4% was expected.
Get me in!
Perhaps the real reason the market suddenly decided to jump on Friday can be summed up by a pragmatic and well respected hedge fund manager who appeared on CNBC during the session and basically applied Occam's Razor to the current situation. “If the US economy does improve,” he questioned, rhetorically, “what will happen? Stocks will go up and bonds and gold will go down. If the US economy doesn't improve,” he continued, “what will happen? The Fed will step in with QE2 and everything will go up”.
In other words, find me a situation in which stocks will not go up. It might be a simplistic view, but in the shorter term at least it's hard to argue. In terms of Friday night, did the stock market go up on a better US economy or a worse US economy?
Well take your pick. Firstly, the German sentiment index is neither here nor there given its magnitude. In terms of US August durable goods orders it was actually a much better result than the 1.3% fall implied. Wall Street prefers to remove the lumpy transport segment (aircraft orders mostly) out of the equation to get a better idea of the underlying trend, and transport fell 2%. Orders for capital goods non-aircraft and non-military (another segment unrelated to actual economic factors) rose 4.1%. This particular number fell 5.3% in July.
What Wall Street really liked is that capital spending rose in August in a month when the stock market was falling. So one might say this result was on the “US economy good” side of the equation. Hence the big rally.
But we also had August new home sales on Friday, and they remained static at an annual pace of 288,000. One might say flat is better than a fall, but flat to what? Flat to the July result which was the lowest since 1963. I think this might fall within the “US economy bad” side of the equation, and is certainly asset deflationary, so the Fed's probably gearing up and that justifies a big rally.
While 200 points is obviously a big rally, there wasn't really much in the way of buying. The Dow simply opened a lot higher and had reached its peak by about 11.30am, and there it stayed for the rest of the session. Volume just snuck over a billion on the NYSE which is slightly better than recent numbers, but still low. You could call it either a short-covering rally and nothing else, or you might surmise that perhaps “window-dressing” has already started ahead of the end of the September quarter this week.
Coming back to chickens and eggs, the US dollar index fell 1% again on Friday, down to 79.27. Chartists have been looking for a weekly close below 80 to call the dollar ready to tank big time. The dollar fell because stocks went up, or was it the other way around? Doesn't matter. The fact the US ten-year bond yield rose 6 basis points to 2.61% might suggest a “US economy good” response but gold rose another US$4.50 to US$1297/oz which suggests “US economy bad, Fed in”. A weaker US dollar simply implies both.
The Aussie subsequently shot back up to its recent high, adding a cent to US$0.9592.
Traders noted that gold actually traded above US$1300 in London for all of the blink of an eye, but here we will find some psychological resistance unless something a bit more major occurs.
Most commodities (grains, lumber etc) jumped 2-4% on the weaker US dollar and oil chimed in with a US$1.32 rally to US$76.50/bbl. Such headline inflation won't stop QE2 because the Fed's core inflation measure does not include food and energy.
Gains in base metals were slightly less exuberant but most metals hit fresh multi-month highs. Copper took a look at its magic number of US$8000/t but got scared at the close.
The SPI Overnight jumped 57 points or 1.2%.
Despite the sharp intraday volatility on Wall Street, the VIX closed at 21. Don't ask me where the new ASX 200 VIX closed on Friday because despite much fanfare from the ASX on its introduction last week, it can't be found on the ASX website.
It might be that because the ASX website is singularly the most frustrating to navigate in the known universe, I'm just looking in the wrong place, so if anyone out there, particularly anyone from the ASX, can tell me how to find the XVI.AX price I'd be much obliged.
So we have a bit of a kicker into this week's trade.
Next week in the US will see the Chicago Fed national activity index on Monday, the Conference Board consumer confidence measure on Tuesday, and the Chicago Fed regional manufacturing PMI on Thursday along with the final revision of second quarter GDP. Economists are expecting this time to remain unchanged at the previous revision level of 1.6%, but clearly there is room for something to happen here.
The big day for the US is Friday, which sees the manufacturing PMI, Michigan Uni confidence, personal income and expenditure and vehicle sales. Friday is indeed global PMI day, so all of Australia, China, the UK, EU and US will report.
Japan will jump the gun with its PMI on Thursday, and this month we have the unusual situation of the HSBC Chinese PMI estimate being released before the official number on the Wednesday, at least according to economic calendars. China will also release monthly industrial profits data on Monday.
Australia has a quiet week ahead of Friday's PMI, except for Thursday which sees new home sales, building approvals, the RP Data-Rismark house price index and private sector credit, which includes home loans. The RBA will be looking very closely at these data ahead of its rate decision on Tuesday week.
There are also a few more ex-divs and AGMs this week.
It will also be interesting in the US next week given the Treasury is auctioning US$100bn of two, five and seven-year notes. It will be the first auction following the Fed's declaration it is now targeting inflation rather than just economic growth in general, and one aspect of QE2 will be the Fed buying Treasuries in the two to ten-year range. The interest will lie in just how much the world wants to get in ahead of the Fed despite historically low Treasury yields.
For further global economic release dates and local company events please refer to the FNArena Calendar.
