Daily Market Reports | Oct 08 2010
By Greg Peel
The Dow closed down 19 points or 0.2% and the S&P lost 0.2% to 1158 while the Nasdaq gained 0.1%.
Wall Street jumped out of the blocks last night in a serious attempt to break Dow 11,000. The major chains reported their same-store sales results for September and the results were very good. September is the most important month for sales outside Christmas as it is the “back to school” period in which uniform-less US school children select their new wardrobes along with their pens and pencils.
Shares in the relevant stores jumped as much as 8% on the news. An 11,000 drop in weekly new jobless claims also helped Wall Street along given a rise was expected. But when the Dow reached 10,998 the square-up began.
While the US unemployment numbers have taken on an essential significance post-GFC, tonight's numbers are particularly crucial. Economists are expecting the unemployment rate to tick up to 9.7% from 9.6% but this is again impacted by the slow lay-off of government census workers, such that the expectation is actually for an increase in private sector jobs of 86,000.
The question is however: if the result is much different, in either direction, how will Wall Street react?
One might be tempted to believe that a good result is bad and a bad result is good. A better than 86,000 increase would mean the economy is a little better than hoped, but then this might only further stall the Fed's QE2 decision, and Wall Street has built in a lot of expectation of QE2. A much less than 86,000 result would suggest the economy definitely needs stimulus, which would further heighten expectation of QE2 and might see Dow 11,000 conquered. Assuming QE2 is already priced in however, is there still that much upside?
Confused? Wall Street was not going to take any chances last night. Indeed, across all markets positions were retreated from to take profits ahead of the uncertainty. The Dow plunged 100 points to be down 70 points before recovering to only a 19 point fall at the close. But right now, all the attention is on currencies and the global Currency War.
When the Dow took a look at 11,000, the US dollar index slipped below 77.00 to be down around 0.5%. But on the square-up, it raced back to close where it began at 77.43. Across the pond, the ECB had left its cash rate unchanged but continued to be the only hawkish major region in confirming it was still withdrawing emergency stimulus, while the Bank of England also left its rate unchanged and surprised some in the market by not following Japan down the QE2 path.
It is possible the BoE held off ahead of this weekend's IMF meeting in Washington which threatens to be a heated argument among the currency “manipulators” and their victims.
The bounce in the dollar was the cue for commodity markets to also square up, and quite sharply so. Gold fell US$12.60 to US$1335.60/oz while aluminium fell 1%, copper 2% and the other base metals 3%. Oil fell US$1.79 to US$81.43/bbl.
The Aussie had a fun 24 hours, actually trading above US99c following the surprise local jobs number before settling back to US$0.9822 on the stronger greenback.
Only the US bond market was unmoved, being, as it is, at the heart of the QE2 implications. The ten-year yield slipped one basis point to 2.37%.
The SPI Overnight fell 17 points or 0.4%.
Underlying this whole pervading, and now increasingly frustrating, QE2 debate is the US third quarter earnings season which began after the bell last night with Alcoa's result. Alcoa's profit was down 21% on the third quarter '09 but earnings per share of US9c handsomely beat Wall Street's US6c estimate, with revenue of US$5.3bn beating the US$4.95bn estimate.
Alcoa shares are up 3% in the after-market. The 21% drop doesn't look too flash, but it was based on lower alumina prices year-on-year. The company had earlier cut guidance on this basis but last night lifted its fourth quarter guidance, given improving demand, which further pleased The Street.
So what's going to happen tonight? I honestly have no idea. I will note however that no one much piled into put option insurance last night as the VIX was steady on 21.
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