Daily Market Reports | Mar 02 2011
By Greg Peel
The Dow fell 168 points or 1.4% while the S&P lost 1.6% to 1306 and the Nasdaq lost 1.6%.
The Madman of Tripoli will not go easily as hoped, and reports suggest Gaddafi's forces have regained control of oil terminals east of the capital. The UN is now applying sanctions and the US has frozen US$30bn in Libyan assets, but resolution, it appears, will not be as swift as that in Egypt.
Meanwhile, violent clashes between protesters and government forces have been reported in Iran, as if in a warning to the world the game is still on in this major oil producer. In Oman, a silent protest was held in the capital Muscat but in the industrial centre of Sohar, troops were deployed to break up protests by firing into the air.
But for all financial market onlookers, the real concern is the world's biggest oil producer Saudi Arabia. Despite the monarchy attempting to head off similar unrest with a preemptive US$36bn social reform package, commentators suggest the people are not assuaged. Last night the Sunni authorities detained a Shi'ite cleric. It is one issue to deal with youth-inspired democracy protests – it is another when opponents are divided across sectarian lines.
The result of the above escalation of tensions across the region last night was a return to panic oil buying. Brent crude has shot up US$3.65 or over 3% to US$115.42/bbl. Psychologically, West Texas crude was the focus on Wall Street as it jumped similarly to near US$100/bbl (and over in the after-market).
That US$100 mark is critical is it appears to be the point over which Wall Street is assuming demand destruction. In other words, listed oil stocks are sought initially on the rising oil price but if that price rises too high, consumers back off and oil companies sell less product. Attention also swings swiftly toward alternative energy sources. As WTI approached US$100/bbl last night oil stocks were heavily sold along with other sectors.
While the Dow Industrial Average was down over 1% last night, the Dow Transport Average was down over 2%, marking a lower low than last week and breaking down through its 50-day moving average. Such breaches set off ongoing technical selling.
In Washington, Fed chairman Ben “Scoop” Bernanke told a Senate committee that a high oil price could impact on the tenuous US economic recovery. He also again denied that QE2 and its implicit increase in the supply of US dollars had anything to do with price rises in oil and other vital commodities. Traders were listening out for any mention of a QE3 but got none. Or did they?
One might assume that rising commodity prices and subsequent inflation would keep QE3 in the can. Around the world central banks are tightening or look set to tighten monetary policy as a result. But Bernanke doesn't give a tinker's cuss about the rest of the world, and the US is still marking very low levels of core (ex food & energy) inflation. So if a rising oil price is scuppering the US recovery come June, there is little to suggest QE3 will not be unleashed.
Geopolitical tensions had gold running again last night, rising US$23.00 to US$1434.50/oz. Silver jumped US81c to US$34.69/oz.
There was not a lot of movement in currencies nevertheless. The euro, for example, is torn between the economic impact of higher oil prices and the inflationary pressure on rates it creates. The US dollar index ticked up slightly to 77.06 while the Aussie risk indicator remained surprisingly resilient ahead of today's GDP release. It was down only 0.2% to US$1.0161.
Base metals were similarly torn. While high oil prices might slow recovery and reduce demand for metals, the LME was last night also dealing with the global round of purchasing managers' index data. The manufacturing PMI in Australia rose to 51.1 last month from 46.7 in January. China's fell to 52.2 (52.9), the UK remained steady on 61.5, the eurozone jumped to 59.0 (57.3) and the US rose to 61.4 (60.8) to mark a seven-year high.
Australia's sudden return to expansion was a surprise, but elsewhere in the developed world manufacturing sectors are quite simply screaming along. This helps to offset China's forced slowdown, which by both official and HSBC independent accounts was not ominous. The world is now more watchful of Chinese inflation anyway, rather than economic growth, in worrying about further tightening.
To summarise last night's sell-off one can draw on three distinct factors – oil, oil and oil. Selling in stocks did not, for example spark counter-buying in bonds. The US ten-year yield was barely changed at 3.41%. There is a lot of reference back to the Middle East-driven oil shocks of the seventies and eighties and the stagflation that resulted, albeit many an economist has risked ignominy by suggesting “things are different now”. Commentators are still holding on to the consideration, nevertheless, that whoever takes over power in various oil producing nations would never cut off those nations' only economic lifeblood.
The SPI Overnight was down 58 points or 1.2%.
Stay tuned today for the release of Australia's fourth quarter GDP result.
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