Daily Market Reports | Nov 05 2010
By Greg Peel
The Dow jumped 219 points or 2.0% while the S&P rose 1.9% to 1221 and the Nasdaq gained 1.5%. The S&P 500 last night pushed through its April peak at 1217 to mark a new two-year closing high.
In March 2009, Ben Bernanke put a shingle outside the US Federal Reserve that said “Free Money Here”. The markets were at the depths of their despair following Lehman and having cut the funds rate to zero the previous December, Bernanke had no choice but to go to the next phase of monetary stimulus. Thus QE1 was implemented to the tune of US$1.7 trillion. In rough terms it was the equivalent of cutting the funds rate further, down to negative 1.5%.
QE1 is still sitting on the Fed's balance sheet, and flows from maturing assets such as mortgage securities are simply being reinvested into Treasuries. As of yesterday, an additional US$600bn of Treasuries will be purchased, with room for more. That's another negative 0.75% equivalent. So let's say that while the RBA cash rate is now 4.75%, the Fed cash rate is minus 2.25%.
From March 2009, the Dow rallied 70% until the European crisis intervened. This time there have been months of anticipation that QE2 would be needed, so prior to the announcement yesterday the Dow had already rallied 17% from its August low before the Fed first hinted at QE2.
How much more upside is there this time?
In the shorter term, one might say that Wall Street is now in a win-win position. If economic data from here continue to be weak (jobs report tonight, for example) then Wall Street knows the Fed can simply up the ante. If the data are strong, suggesting QE2 could be downgraded, well that doesn't matter. Strong data means strong economy means strong share market anyway. The only question is as to whether much of the upside has already been accounted for by the market.
On last night's moves, you'd have to say no.
It would be misleading, nevertheless, to call last night's stock market move a “rally”. The indices simply opened up from the bell almost at the level of where they were to close. The US had time to think about the implications of the Fed announcement and Asian and European money was also ready to respond as well. The result was simply a QE2 step-jump, which some put down to the figure of US$600bn being a bit more than the US$500bn popularly anticipated.
But having said that, volume on the NYSE big board was, at 1.4bn, about 50% better than the recent running average. There was new money coming in. The new money was further assisted by the unwinding a pre-announcement options protection. If those who hold put protection sell back to market-makers, those market-makers have to buy stock to reverse their hedges. The VIX volatility index last night fell over 5% to 18.5. It had already fallen 10% immediately after the Fed announcement on Wednesday. Its post-GFC low is 15 which was marked in April just before the European crisis hit.
If you were looking to play “sell the fact” last night, in any financial market, you would have been run down by a steamroller. Are the sellers waiting for a better opportunity? The S&P did spend some time trying to get through the 1217 previous high mark last night before a very late kicker.
With the Fed having made its much anticipated move on Wednesday, it was up to both the European Central Bank and Bank of England to make any necessary policy response at their respective scheduled meetings last night.
There were no surprises when the ECB kept its rate steady at 1%, given it has actually been winding back post-crisis monetary stimulus. President Jean-Claude Trichet did not suggest any concern over the strong euro at this stage and told reporters he did not support “disorderly” moves in currency markets. Bit of a niggle there?
Nor did the BoE shift from 0.5%. Suggestions in earlier months that the UK central bank would be forced to implement its own QE2 seem now to have been put to bed given recent economic data have proven surprisingly resilient to strict fiscal austerity measures.
So no new fronts from across the pond in the Currency War. Across the other pond however, the Bank of Japan began its two-day extraordinary policy meeting yesterday and it is tipped that further monetary stimulus will be announced today to resupply the War in the Pacific. The BoJ has already announced QE measures and has intervened directly in the yen, which continues to push through multi-decade highs against the greenback.
Which it did again last night. The US dollar index fell 0.5% to 75.91. And all hell broke loose.
Parity? Aw yeah I remember parity. Seems so long ago now with the Aussie up over a cent last night to US$1.0161. Never mind yesterday's weaker than expected Australian economic data.
Blue skies were smiling in precious metals, as gold leapt 3% or US$43.60/oz to US$1391.90/oz and silver jumped 5.5% to US$26.25/oz.
It was a case of hang onto your hats in commodities, as oil rose 2% or US$1.54 to US$86.28/bbl and over in London aluminium jumped 1.7%, copper and tin 2.5%, lead 3% and nickel and zinc 4%.
Might one expect that if money poured into the stock market, some of it must have come from the bond market? No, no, no. Not when the Fed will be buying another US$600bn of 2-10 year Treasuries to add to what it has already been buying. The benchmark ten-year yield plunged 11 basis points to 2.48%. The twos were down one bip to 0.33% and the thirties were up one bip to 4.06%.
The US yield curve has steepened yet again. This is great news for banks, because they borrow short and lend long. But what a steep yield curve indicates is inflation expectations. The potential id to the QE2 ego is steep inflation, even hyperinflation, down the track. As one respected hedge fund manager said on CNBC this morning, “don't forget it costs about a trillion to buy breakfast in Zimbabwe”.
That is the grave fear held by many, and if you take CNBC interviewees as a sample set the statistical reality is that it is the crusty old hands who are shaking their heads in despair and the young bucks who are “all the way with Uncle Ben!”. QE2 cynics are also waiting for the new dollar bills to fly straight out across the oceans to bolster other nation's economies rather than America's. Why is the Aussie now at US$1.01? Just look at the implied 7% differential in the respective cash rates.
The SPI Overnight was up 74 points or 1.6%.
It's jobs night tonight in the US but hey – who really cares? Forecasts are for 60,000 new jobs but the signals are mixed. Wednesday's ADP report showed about 25,000 more jobs added than expected but last night's weekly new jobs claims number showed an increase in dole claimants of 20,000 which was 7,000 more than expected.
But good is good and bad is good now in the Age of QE2.
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