Daily Market Reports | Sep 30 2010
By Greg Peel
The Dow closed down 22 points or 0.2% while the S&P lost 0.3% to 1144 and the Nasdaq slipped 0.1%.
In a session devoid of economic data releases and with the prospect of QE2 simply pervading as a spectre, Wall Street wandered aimlessly last night. The Dow was down 40 twice and back to flat twice before settling on a 22 point loss. The only sector of any note was energy, which responded to a stronger oil price driven by lower than expected weekly inventories.
Longer term readers of this Report will recall my total disdain for the weekly US crude and gasoline inventories release – not because it's not accurate but because (a) the result is almost always very different to market expectation and (b) weekly fluctuations are simply not significant in the same way weekly jobless claims are insignificant on their own. It is the trend that matters. And in the case of crude, the US has more than it knows what to do with.
That didn't stop oil jumping US$1.68 to US$77.86/bbl last night with the assistance of a weaker US dollar. Let's face it – traders need something to trade off right now.
The US dollar index fell another 0.2% to 78.77 last night but it has now reached a point that has polarised commentators. Having fallen some 7% in September mostly on euro strength (and despite yen intervention) one half of the market is calling a pending rebound while the other half just keeps chanting Q-E-2.
I noted yesterday that at US$1.36, the euro has come a long way back towards its pre-crisis level of US$1.40 having hit a crisis nadir at US$1.20. One can argue as to whether the situation in Europe has really improved that much, particularly now that the Irish government is planning a fresh bail-out of the Anglo Irish Bank and workers in Spain and other embattled PIIGS are gearing up for another round of austerity protest strikes. However, it's a two-way street and on the US side, heightened expectations that QE2 is just around the corner are enough for many to ignore Europe and stay local.
On the matter of QE2, it was an interesting night last night albeit one that seemed to have little impact on dollar weakness. Three separate regional Fed governors made speeches and in so doing highlighted QE2 dissent in the wider Fed ranks. The Boston Fed president was strenuously calling for QE2 while the Philadelphia Fed president was dead against it and the Minneapolis Fed president questioned whether it would actually make any difference.
It must be noted Fed chairman Ben Bernanke is a raging money printer and that of the above, only the Boston president actually has a vote on the FOMC. Yet it is well known that for all of 2010, Kansas City Fed president and FOMC voter Thomas Hoenig has not only been against further monetary stimulus, but he has argued hard for an interest rate increase instead to prevent the US simply slipping back into an asset bubble situation fueled by overly free money.
Despite all of the above, Wall Street clearly is still expecting QE2 in one form or another, whether it is announced in one big lump or spread across an unstated time frame in smaller reactionary parcels. Certainly gold is backing QE2, although gold did pull back from its Asia-zone highs around US$1314 yesterday to close up only US90c to US$1309.90/oz in New York.
Be warned. If the Fed for some reason (such as a strong economic data read – unemployment is coming up next week) indicates any wavering in its QE2 intentions then gold could really take a hit. It's been a real struggle to grind through 1300 these past couple of weeks.
The big news last night was that on a weaker greenback, and based entirely on technical trading copper finally broke up through its “magic” US$8000/t mark. It took less than a 1% move to get to US$8048/t and the other metals were similarly mildly stronger, but like any other psychological number this is the one the commodities markets have been anticipating for some time. Of all the metals, copper is the one most fundamentally impacted by tight supply and deficit forecasts irrespective of technicals and US dollar influence.
Copper has not been above US$8000/t since the heady days of early 2008 when all commodities were running riot and oil reached US$147/bbl. At that time, US$9000/t proved a bridge too far and we all know what happened next. But copper is now up 167% from its GFC nadir at US$3000/t. It will be interesting to see, nevertheless, whether copper can maintain 8000 next week while China is on holidays.
The world's favourite commodity currency traded above US$0.97 in yesterday's trade but slipped back overnight to be up only slightly in 24 hours to US$0.9686.
If rumblings in the Fed ranks did little to impact on the greenback (albeit the US dollar index did close off its lows) it was the US bond market which paid more attention. As was the case with the two and five-year auctions in the past two days, last night's auction of seven-year notes found better than running average demand to settle at 1.89%. But this time all maturities found selling on the day, sending the benchmark ten-year yield up 3 basis points to 2.50%.
The SPI Overnight lost 5 points or 0.1%.
We are about to enter October – the month that makes an old trader's blood turn cold. Yet September is the worst month on historical averages and assuming no disasters tonight, Wall Street will have its best September in 71 years. We seem poised here now though, waiting to see what happens next. And that all centres around the “will they, won't they and if so when” question of QE2. A lot of expectation is built in, so as noted above any wavering from the Fed might spark another October of fear.
Today in Australia is one of those “anything can happen” days because books will be ruled off for the end of the quarter. This could either mean profit-taking after a good month or window-dressing for a winning quarter or both.
The baton then passes to the US tonight for the same action, with the final revision of second quarter GDP thrown in for good measure.
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