Daily Market Reports | May 19 2011
By Greg Peel
The Dow rose 80 points or 0.7% while the S&P gained 0.9% to 1340 and the Nasdaq jumped 1.1%.
Tuesday night's session on Wall Street saw a big turnaround from the lows, and last night's session took that ball and ran with it. Impetus was provided by the solid Dell result in the previous after-market. The US dollar index fell initially, and commodity prices rose. But early in the afternoon came the release of the Fed minutes.
The minutes of the Fed's April meeting suggested discussion was dominated by the theme of QE exit strategies. Members were only kicking the can around at this stage, given the April statement outlined the Fed's intention to end QE2 by end-June as planned but to continue to reinvest interest payments and maturing principal into Treasury securities, which we call QE2.5. But just as members have been split on whether rates should be raised sooner rather than later to offset inflation pressures, so too are they split on just how to get out of QE when the time comes.
Some members favoured selling out of all QE assets first and then raising the funds rate, while others wanted to raise the funds rate first and then begin selling assets. What they did seem to agree on at this point was, however, that any new stimulus (QE3) would only be implemented were US economic conditions to change dramatically. This is despite noting that the US recovery was now more modest than had earlier been hoped.
It must be noted that all along Bernanke had suggested high commodity prices would prove transitory, thus countering the concerns of more hawkish members. Well, he probably allowed a big “I told you so” now, given the steep correction in commodities prices experienced since the meeting.
So if it was only can-kicking at this stage, is it important? Well yes, because traders will always react immediately to the minutes when released in order to get the jump on the rest of the market. Some speed reading is thus necessary given the size of the document, and it's pretty easy to latch on to one point prematurely. As it was, the fact that exit strategies dominated discussions meant the US dollar index immediately turned around from the session low at 75.13 and bounced straight up to 75.49 on the assumption such discussion meant tightening was around the corner. What they saw was this:
“Most participants saw changes in the target for the federal funds rate as the preferred active tool for tightening monetary policy when appropriate.”
What they missed, however, was this (my emphasis):
“Participants noted that the Committee’s decision to discuss the appropriate strategy for normalizing the stance of policy at the current meeting did not mean that the move toward such normalization would necessarily begin soon.”
And this:
“A majority of participants preferred that sales of agency securities come after the first increase in the FOMC’s target for short-term interest rates, and many of those participants also expressed a preference that the sales proceed relatively gradually, returning the [balance sheet's] composition to all Treasury securities over perhaps five years.”
Clearly we're not about to see a rapid turnaround in Fed policy, but nor are we looking at QE3 any time soon. The US dollar index eventually settled at 75.40 – virtually unchanged over 24 hours. Importantly, however, the US dollar spent all session falling until the release of the minutes, yet commodity markets closed as the minutes hit the screen. London is well shut, while oil and precious metals trade on in after-markets. So last night's commodity price movements need to be appreciated in terms of what those markets missed. And the moves were significant.
Nickel was up 1.5%, aluminium and tin up 2%, copper and zinc up 3% and lead up 5%. When copper broke above US$9000/t last night, buy-stops were triggered (ie get-me-in orders) and all the other metals followed.. Traders did note that commodity funds were actually selling into the rally, not supporting the buying. Oil was supported by a drop in US weekly inventories, so West Texas was up US$2.89 to US$99.80/bbl and Brent was up US$2.31 to US$112.30/bbl. Gold chimed in with a US$10.70 rise to US$1496.50/oz and silver jumped 3.5% to US$35.03/oz.
This should all add up to a solid day on the local bourse today, but we must bear in mind there was a lot of knee-jerk reaction ahead of a more careful interpretation of the Fed minutes. In other words, the odd grain of salt is recommended.
It also seems as though we had a Goldilocks session last night as far as the Australian market is concerned, because commodity prices surged but the Aussie remained virtually unchanged at US$1.0632. Again, we really need to let the dust settle before getting too excited. We had a session where the US dollar fell first and commodity prices surged. Then the dollar bounced hard when commodity markets closed. The US dollar bounce may be premature once one reads the minutes more carefully, so it's all a bit of a guess as to what tonight will bring.
The SPI Overnight was up 24 points or 0.5%.
Rudi will not be appearing on Sky Business today as scheduled given he's been bumped for something more interesting, being the New Zealand budget.
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