Daily Market Reports | Dec 14 2010
By Greg Peel
The Dow closed up 18 points or 0.2% while the S&P was flat at 1240 and the Nasdaq fell 0.5%.
As has oft been noted in this Report over the years, the Dow Jones Industrial Average is not a very useful indicator, being the simple average price of the 30 “top” stocks only. Changes to the basket occur very infrequently, such that America's second biggest company – Apple – is not even in there. Most traders and fund managers ignore the Dow and concentrate on the broad market, cap-weighted S&P 500.
But the Dow is still the traditional benchmark given a century of history, and thus it still carries psychological weight. Therefore the fact that last night it seemed the Dow would become the last of the three major indices to hit a new post-GFC closing high, and in doing so to scrape above the level from which it fell the day Lehman went under, could have been an encouraging milestone.
The Dow was very much on track at 3pm when it was up 70 points, but in thin trade the sellers slapped it down on the death. The previous closing high is 11,444 and this close was only 11,428. The Nasdaq also ended its eight-day winning streak on what clearly was profit-taking. Many Nasdaq tech stocks have been hitting all-time highs, not just post-GFC highs.
On the assumption that European problems are once again contained, and assuming no other exogenous impacts (Korean war for example), Wall Street now has the more positive bias it was supposed to have been granted by QE2. With US funds still underweight equities, the risk is to the upside and the Santa rally expectations appear intact. Yet last night's session was not exactly based on exuberance, and came with one big caveat.
China is the third point of the triangle along with the US and Europe. The world was expecting Beijing to again raise interest rates on the weekend following another release of above-expectation inflation data. But instead it merely upped the bank reserve requirement for the sixth time this year, citing seasonal factors in soaring food prices as reason not to be too hasty on interest rates. Once again it is apparent Beijing is in no hurry.
Beijing will, however, raise interest rates some time soon and also revalue its currency. One assumes the risk trade will stumble at this point but for now it seems the lights are green. So last night speculators once again piled into the benchmark metal copper, sending it up 2.5% on the LME. All metals responded with 1-3% gains. Oil rose US82c to US$88.61/bbl.
Commodity prices were pushed along by a 1% fall in the US dollar index to 79.34 as a direct result of Chinese monetary policy and no new news out of Europe, which is good news. The euro jumped 1.3%. Gold rose US$8.90 to US$1395.80/oz and the Aussie is back in parity mode, rising a cent to US$0.9951.
The US ten-year bond yield continued its gradual rise, hitting 3.4% at one point, but then the Fed came in with more QE2 purchases and the ten-year closed down three basis points to 3.29%.
The SPI Overnight was up 11 points or 0.2%.
Tonight the Fed makes a “rate decision” but nothing is expected to change. Tonight and throughout the week there will be a wide range of US economic data releases which, assuming no sudden moves from Beijing, will potentially provide a catalyst for the Dow to finally scrape over the line.
Today in Australia sees the monthly NAB business survey. Brokers suggest that local funds have begun to wrap up for Christmas and New Year, with many hedge fund traders already off for their breaks. No point in overplaying portfolios so close to the end of another turbulent year. It will be up to the offshore investors to provide any impetus beyond what now seems like a quiet drift to year-end.
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