Daily Market Reports | Apr 15 2011
By Greg Peel
The Dow closed up 14 points or 0.1% while the S&P was flat at 1314 and the Nasdaq was also flat.
From the opening bell, the Dow plunged 100 points last night on a combination of disturbing news.
Late yesterday Sydney time it was revealed a US Senate investigative panel is accusing Goldman Sachs of having profited at its clients expense by being short the CDO market into the GFC, more particularly encouraging clients to buy positions so Goldman's proprietary desk could take the other side.
Correct me if I'm wrong, but didn't we do all this a year ago? In that case, Goldmans simply nipped the legal process in the bud with a petty cash payout. In terms of yesterday's allegations, commentators agree that it will all come down to the subtle wording of the relevant act. Either way, Goldman Sachs may not have invented teflon but sure knows how to use it. You don't become the “bank that runs the world” otherwise.
Whenever Goldmans comes under fire there is a bit of panic in the financial sector. Adding to the weakness last night, somewhat ironically, was a report from Goldman's bank analyst downgrading the financial sector to Neutral from Overweight in the wake of the mortgage foreclosure penalties many US banks will be forced to fork out.
Before the bell also came the weekly release of new jobless claims numbers. I've said a million times this weekly data is volatile and it is the underlying trend that should be noted rather than each week's number, but last night the recent positive trend was bucked when 412,000 people joined the jobless. The previous four weeks' results had featured numbers under 400,000, and 400,000 is considered the rough turning point into unemployment rate reduction.
Then came the March producer price index release which showed a headline rise of 0.7%. That's down from February's oil-and-food-driven 1.6% and actually below economist expectations of 0.8% due to lower food prices, but it was the core reading which spooked the market. Economists had expected 0.2% for the core, and the result was 0.3%.
There is no guarantee the PPI result will translate into the CPI, given it depends on retailers being able to pass on costs. This month's Fed Beige Book noted that an inability to pass on inflation was one of the biggest problems facing business. But that in itself signals difficulty for the US economy, and the “I-word” in general is a scary concept because it ultimately leads to Fed tightening. Not that the Fed believes higher prices of oil and other commodities is anything but “transitory”.
So 'twas on all of the above that Wall Street saw a weak opening, but there it found support and spent the rest of the session grafting back, with defensives such as Coke, Kraft and Merck leading the buying at the expense of the cyclical sectors.
In currency trading, the euro had dipped early when Germany suggested Greece was still not doing enough to rein in its deficit, sending Greek and Irish sovereign bond yields soaring once more. The market is worried both countries will need to restructure their debt but then if you haven't set yourself by now for this inevitability, you only have yourself to blame. As it was, the euro recovered in the US session given underlying ECB rate rise support, and given the weak US jobless number had the US dollar index also falling. The dollar index fell 0.3% to 74.71. The Aussie added 0.4% to US$1.0542.
The weaker dollar was the trigger for gold to rally once more. I noted earlier in the week that the raising of the Fukushima nuclear alert level to 7 saw a flight to cash which, illogically, included dumping gold positions, and that such events are enjoyed by gold bulls as a buying opportunity at lower levels. Last night gold jumped US$16.60 to US$1473.70/oz and silver leapt 3.5% to over US$42/oz.
Oil had fallen sharply earlier in the week and then Wednesday night saw Brent bounce back strongly, leaving West Texas behind. So last night West Texas decided to play catch-up in rising US$1.38 to US$108.39/bbl while Brent slipped US57c to US$122.36/bbl. The “rise in oil” helped US oil producers gain more ground.
It was a steadier session for base metals in London albeit the bias is still to the downside, with nickel, lead and zinc all falling 1% while copper was steady.
Over in the bond market there was very strong demand for the Treasury auction of US$13bn of thirty-year bonds, with foreign central banks buying 47% of the issue compared to a running average of 40%. This caused a slight flattening of the yield curve, given the thirties were down one basis point of yield and the tens were up four to 3.50%.
It's only one session, but banks like their yield curves to be as steep as possible so they can sell expensive long-dates (eg mortgages) and cover with cheap short-dates.
The SPI Overnight was up 4 points.
It's China's monthly “data dump” day today, which sees releases of the March PPI, CPI, retail sales, industrial production and fixed investment. Economists are looking for a CPI jump of 5.2% compared to last month's 4.8%.
The US will then release its CPI and industrial production tonight. All things being equal, Wall Street will see a weak bias to the opening tonight given the release of Google's result after the bell this morning. Google missed on the earnings line and its shares are down 5% in the after-market. Google is not a Dow component but it is a big chunk of the Nasdaq 100. Bank of America (Dow component) will report early tonight.
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