Daily Market Reports | Sep 29 2010
By Greg Peel
The Dow closed up 46 points or 0.4% while the S&P rose 0.5% to 1147 and the Nasdaq added 0.4%.
Wall Street reversed its losses of Monday last night in a stoic session which featured a reversal from early losses from the opening bell. The Dow was down 80 points from the open but was back at square by 11am before stumbling along to a 46 point gain by the close.
While commentators were heartened by the reversal, and noted that a break of S&P 1150 could spark another kick up, realistically it was another session in which bad news is good news because it awakens the Fed.
The Conference Board reported its monthly survey of US consumer confidence before the bell last night, and it fell sharply to 48.5 from 53.2 in August when economists had expected a fall to only 51.5. That's the lowest read since February. Commentators suggested that NBER's recent declaration the recession ended in June 2009 has made little difference to consumers who feel like they're still very much in a recession anyway.
Case-Shiller also reported its monthly 20-city house price index for July, which rose 3.2% year on year. While this looks promising, the reality is this lagging index works on a three-month rolling average which means it will shortly roll out of the period in which the pending expiry of government tax credits sparked a late rush of home buying. Case-Shiller nevertheless believe US house prices will soon improve in earnest, slowly, but that their index will still have to drop first to represent the black hole which followed the tax credit expiry.
Wall Street responded negatively to these data briefly before the obvious realisation dawned. The worse the news, the more likely the Fed will be forced to act. Hence the turnaround.
Anticipation of QE2 was again evident in the bond market last night as a US$35bn Treasury auction of five-year notes again received strong demand, pushing the settlement yield down to a lower than expected 1.26%. Another auction, another record low yield. Foreign central banks bought 50% compared to a running average of 43%.
Despite America's ongoing budget deficit, Treasury supply of new bonds has actually been gradually falling from the heady days past. This puts even more pressure on prices, particularly if the Fed does jump in and soak up what's on offer. But if current bond demand is all about expectation of QE2, then the Fed might just have a new tactic up its sleeve.
The Wall Street Journal last night suggested the Fed was considering approaching QE2 bond purchases differently to the shock and awe strategy of QE1. In March 2009, the Fed simply wanted to assure the market the central bank was there in support, and as such the Fed announced a pre-determined dollar value of bonds to be bought (US$1.7trn) over a pre-determined time frame (6-9 months). This time the Fed's intention is not so much one of “shock and awe” for a perilous system but of measured support for a stumbling economy.
To that end, the Fed is currently weighing up the prospect of only announcing small bursts of bond purchases in a small time frame and then leaving the door open for more to follow, according to the WSJ. This will provide the central bank with greater flexibility to respond to ongoing economic data and one presumes will also alleviate some of the “bond bubble” problem if punters are not sure at any point exactly just what volume of bonds the Fed will buy.
Meanwhile across the pond, the European Union is taking the opportunity of anticipated US QE2 to deflect the “crisis” perception away from Europe and back to the US. When the European debt crisis hit earlier this year the ECB stepped in with special liquidity provision measures which, given there is no ECB bond, was its own form of QE2. But despite lingering doubts over Ireland, and unsettled markets in the other PIIGS, an ECB board member last night pointed out that the central bank was on track in its process of gradually withdrawing the special liquidity provisions.
While such comments may help to ease global fears over Europe, the response is a stronger euro which is not so good for European exporters in the face of government austerity drives. When Greece first sparked sovereign debt concerns back in February, the euro was at US$1.40. It fell as low as US$1.20 when the crisis escalated but by last night it was pushing back up toward US$1.36.
Euro strength persists despite more lame talk from the ratings agencies last night. Standard & Poor's is now threatening to downgrade Ireland given problems at Anglo Irish Bank while Moody's is warning Spain's AAA rating is in jeopardy.
The rise in the euro last night helped to push the US dollar index down again, falling 0.6% to 78.94. The last time the “Dixie” was below 79 was also last February. The weaker greenback helped the Aussie to a new recent high, up 0.6 of a cent to US$0.9676.
And the weaker greenback was also the fillip for gold to finally breach the 1300 mark on a New York close. Gold rose US$14.40 to US$1309.00/oz. The breach may now open the floodgates, but typically gold has to pull back and do some work around such “big figures” to establish its next launching pad.
The dollar also helped base metals push about 1% higher but oil fell US34c to US$76.18/bbl and really seems somewhat lost in the wilderness right now.
The SPI Overnight rose 17 points or 0.4%.
Just a follow up on my report yesterday about the big “fat finger” error on a small Nasdaq stock which saw trades from US$44 to US$4 in the blink of an eye and 160 orders filled. The immediate suggestion was that the new “circuit breaker” had failed to react, which should have seen trade in the stock halted for five minutes as soon as it fell 10%.
Well the scary news is that the circuit breaker was indeed activated. The problem is, the SEC's reaction time is all of five milliseconds. High Frequency Trading programs operate on microseconds. The HFT programs had responded, recovered, showered and changed and were down at the pub having a beer before the circuit breaker even kicked in.
God help us.
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