Daily Market Reports | Dec 02 2010
By Greg Peel
The Dow jumped 249 points last night or 2.3% while the S&P managed only 1.6% to 1206 (1200 being resistance) and the Nasdaq added 2.0%.
Let's start with yesterday's global round of manufacturing purchasing managers' indices (PMI).
The two-speed economy was again evident in Australian data following on from the weak GDP result, with the PMI falling further into contraction to 47.6 from last month's 49.4. More ominous, however, was a big drop in capacity utilisation, which fell to 74.6% from 77.4%. Moves of much more than 1% in a month are rare.
The RBA has constantly touted “limited spare capacity” as a significant factor behind its hawkish, pre-emptive policy stance, albeit low unemployment is very much a reflection of limited spare capacity as well as idle factories. But idle factories do not need workers.
The most closely watched of PMIs is arguably China's, and it rose steadily to 55.2 from 54.7. HSBC's independent survey concurred, showing 55.3 from 54.8. So markets across the world were excited again, and will be for a couple of days until someone says “interest rate hike” and everyone will panic as if that idea came completely out of left field.
But the European Union is very much in the frame at present, so great heart was taken by the big jump in the UK PMI, to 58.0 from 55.4 (the highest level in 16 years) and a steady rise in the eurozone PMI to 55.3 from 54.6.
China and EU data were enough to get Wall Street fired up, such that the US PMI's drop to 56.6 from 56.9 was still taken positively. One must remember that these numbers do not represent growth but rate of growth, such that while the US number fell it only means a slight slowing in the rate of growth, rather than negative growth, given the number is still above the 50-neutral mark. November marked the sixteen straight month of expansion.
The London FTSE and the German DAX were both up over 2%. The strong UK manufacturing number pretty much put to bed any notion of QE coming from the Bank of England, which provided support for the pound. Tonight in Europe the ECB will make its “rate decision”, and although the cash rate will be left at 1% attention centres on what sort of monetary policy changes the ECB might announce, if any, in the wake of the latest sovereign fears.
Were Jean-Claude Trichet to announce he will continue to withdraw the emergency loan measures implemented during the initial Greek crisis, in theory that should provide support for the euro. However, Trichet might actually go the other way, reimplementing emergency loans now that Europe is again falling apart. While more euro supply means a weaker euro in theory, emergency loan support should serve to reverse some of the panic euro weakness of November. It's a matter of soothing savage breasts with perceptions of control – something that Trichet is usually horrendously bad at.
Given the uncertainty of what the ECB might announce, bond traders took a breather from slamming PIIGS bonds last night. The breather helped allow stocks to rise.
This was the situation prevailing as the bell rang on the NYSE, but not before the release of the ADP private sector jobs report. It showed 93,000 new jobs added in November – the biggest addition in three years. Economists now expect a non-farm payrolls addition on Friday of 155,000. It is estimated that more than 150,000 new jobs are needed to move the unemployment dial.
So Wall Street was off to a flyer, with the Dow jumping 200 points on the open. No doubt there were some shorts being covered. But there it flat-lined until a Reuters wire provided another sudden boost at noon which did come out of the blue.
The Reuters wire suggested the Fed, which as we know can print money at will, was planning to inject more funds into the IMF to help support the EU-IMF eurozone bail-out fund. With Portugal, Spain, Italy and even Belgium lining up like ducks at the shooting gallery, concerns have been raised that the current fund is insufficient. Fed to the rescue?
The euphoria ebbed a bit when next a Dow Jones wire suggested, about an hour and half later, that this rumour was unfounded. But by this stage Wall Street had decided the concept was not beyond the realms, and talk of coordinated Fed-ECB QE had everyone salivating. Suddenly everyone was a bull again, and the Dow added another 50 points to the close. Look out Santa here we come!
Of course, it could all come crashing down tonight if Trichet says “don't be so ridiculous,” which is hardly a stretch.
[Note: While the ECB can “print” euros just as the Fed can “print” dollars, there is no EU bond, only individual sovereign bonds. That's why the EU issues emergency loans which can be taken up by banks while the Fed buys US Treasuries.]
Whatever is announced, or not, in the next day or so, the thought of a coordinated ECB-Fed monetary policy strategy has much merit. The so-called “Currency War” being fought at present is all about the independent action of central banks, which represents a shift in policy two years out from the GFC. When the GFC hit, all central banks got together to discuss and implement a common strategy, being cash rate cuts, while governments chimed in with fiscal stimulus. The US dollar and the euro have been flying backward and forth over 2010 because global policy has not been coordinated. Whatever one might think of money printing, if it's going to happen it's best that it is not a “beggar thy neighbour” affair. Or to use another analogy, best that one doesn't rob Peter to pay Paul.
The euro unsurprisingly bounced last night – up 1.2% to over US$1.31. The US dollar index fell 0.8% to 80.68. Funnily enough however, the dollar index had actually started the session stronger. But it absolutely plunged on the Reuters wire and did not rebound on the Dow Jones wire.
Risk was back in favour, so the Aussie rebounded by 0.8 of a cent to US$9678. Gold wasn't quite sure what to make of it all, so it was relatively steady at US$1387.00/oz.
It was a very different story on the LME, where cheers went up as the global PMI data rolled across the screens and volumes jumped as traders weighed up strong global manufacturing with rapidly dropping copper inventories. Copper was up 3%, and so was pretty much everything else.
Oil chimed in with a $2.64 jump to US$86.75/bbl.
And US Treasuries were trashed. More money printing? Oh God, hyperinflation here we come. The benchmark ten-year yield rose a massive 17 basis points to 2.97% as traders bailed out.
The SPI Overnight rose 62 points or 1.4%.
An interesting statistic was articulated on CNBC this morning. The tech-laden Nasdaq is up 16% in 2010 and 80% since the March 2009 low. That's double the gain in the S&P 500. It just goes to show what a weaker dollar can do for that which the US exports and for which it has a seemingly unassailable monopoly – whizz-bang computer and personal device technology. Apple shares, for example, are up 66% in the period to make Apple the second biggest US stock after Exxon.
And Apple's not even in the Dow Jones Industrial Average – yet. Obviously traders wanted “blue chips” last night, given the disparity between the Dow's rise and the rise in the S&P.
So now what? Well – these sharp, short-covering snap-back rallies have been a repetitive feature of every weak period since late 2007. So let's not get carried away just yet. Beijing could announce a rate rise any moment, and the ECB could really throw around a lot of cold water.
Aside from the ECB monetary policy update tonight, the EU third quarter GDP result will be revised. In Australia today we'll see the October trade balance.
More importantly of course, Rudi will be hamming it up on Lunch Money on the Sky Business Channel at noon.
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