Daily Market Reports | Oct 07 2010
By Greg Peel
The Dow closed up 22 points or 0.2% while the S&P slipped a point to 1159 and the Nasdaq fell 0.8%.
The Nasdaq's individual fall was related to a couple of broker downgrades of semiconductor companies and a big shake-out in what has become a bubble sub-sector – that of “cloud” computing – following one leader's big guidance downgrade.
For the Dow and the broader S&P 500 it was a case of “what can actually take the market lower?”. Stocks were moderately higher in the morning with the Dow up about 30 when the September ADP private sector jobs report was released. Economists had expected the private sector to add 20,000 jobs but were surprised when a 39,000 drop was recorded. That's the first fall in private sector jobs since January.
You'd have to say things are looking bleak in the US. But then we know what that means. The Dow fell 60 points on the news but recovered to the close for the simple reason any bad news on the economic front can only mean QE2 is getting closer. Ben Bernanke was dropping more hints on Monday and the question now is not “if” but “when”. Will the Fed simply wait until the next policy meeting in November and let Wall Street agonise for another full month?
Friday night brings the official non-farm payrolls number which includes public sector jobs, and it's the public sector that's been holding up the employment numbers post-GFC to offset weaker private sector numbers. But ahead of that release, tonight sees policy meetings for both the Bank of England and the European Central Bank.
In a stark contrast, the BoE is thought to be on the cusp of announcing its own round of QE2 while the ECB is expected to ratify its recent moves to withdraw from its QE measures post the European crisis.
The global market appears to be easing into a more comfortable view on Europe, accepting that Ireland, Greece and Portugal could still be a problem but that contagion will not spread to the much larger Spanish and Italian economies, and by contrast the big European economies of Germany, France and Holland are rolling along okay. Last night Fitch made a late-to-the-game downgrade of Ireland's sovereign debt but no one blinked.
Indeed, the euro powered up another 0.7% to above US$1.39. If it hits US$1.40 it will have surpassed its pre-Greek crisis level, suggesting it was all just a dream. Euro strength is nevertheless more of a factor of US dollar weakness, but it is not helping Germany et al on the export front. And withdrawal of QE by the ECB, whether or not sensible in isolation, only adds to the relative strength.
So on yet more Fed QE2 anticipation the US dollar index fell another 0.5% to 77.44 last night, and on the flipside the yen is now back where it was when the Bank of Japan was forced to intervene last week. Now there's a classic case of fighting a losing battle, given all the fanfare of the BoJ's QE2 announcement on Tuesday.
While the US stock market came out net level on the day, it was not the case in the bond market. On heightened QE2 expectation the ten-year bond yield fell 8 basis points to 2.39% which is the lowest level since the post-GFC depths of January 2009. The five-year yield briefly touched 1.12% to mark an historical low.
While the trader's adage is always “Don't fight the Fed”, commentators are left shaking their heads to think investors will still buy five-year Treasuries at what is now a negative real return while dividend yields of up to 5% on Dow stocks go begging. Large corporates are borrowing money to pay dividends and those yields are higher than the cost of borrowing. Something is very wrong.
That's also why many a commentator can't see the US stock market as being anything but up by year-end, which in itself is a little disturbing. They simply cite the win-win situation of the Fed acting as backstop.
The weaker US dollar sent the Aussie up another 0.6% to US$0.9770 last night and gold added another US$7.80 to US$1348.20/oz. It has now become popular among economists to point out just how “overvalued” the Aussie is and to warn of too big a one-way trade in gold, but just as the US bond “bubble” refuses to pop, it all comes down to Ben and his printing presses.
The dollar had oil adding US55c to US$83.23/bbl but base metals met some late-session profit-taking last night to close mixed on less than 1% movements.
The SPI Overnight rose 6 points or 0.1%.
Wall Street will pay close attention in tonight's session to same-store sales results for September for the big chains, given it's “back to school” season in the US – a season topped only by the obvious one given US school students don't wear uniforms.
But the real focus will be on the after-the-bell release of Alcoa's third quarter profit, which waves the flag for the third quarter profit season.
Ahead of that, it's unemployment day in Australia today.
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