Daily Market Reports | Jun 09 2011
By Greg Peel
The Dow closed down 21 points or 0.2% while the S&P lost 0.4% to 1279 and the Nasdaq was hit 1.0%.
It is a truth universally acknowledged that each year OPEC members meet in their headquarters in Vienna and agree upon production quotas, but then go off and produce as much oil as they like. The quotas might be a guide but they're certainly not a rule. Never before have the OPEC members actually failed to come to an agreement on quotas. That's what happened last night.
Media in Vienna noted that when the doors to the meeting opened, oil ministers stormed out in anger. The Saudi minister was particularly peeved and reports suggest the failure to reach an agreement was largely down to disagreement between the Big Two of Saudi Arabia and Iran. While the Arabs and Persians have always been on either side of the Muslim sectarian divide, perhaps the latest goings on in MENA have heightened the acrimony. Saudi Arabia's support for Bahrain and Iran's support for Syria put the two at odds.
There are nevertheless a couple of points to note. The first is that had OPEC increased the quota as was largely expected, it would only mean bringing the quota up to meet current production levels and not vice versa. The idea of raising the quota is to curb high oil prices which lead to demand destruction. The second point to note is that Saudi Arabia is the only OPEC member with any real spare production capacity. And it is already covering for lost production from Libya. Last night the Saudi oil minister vowed that Saudi Arabia would step up production by itself to ensure prices don't get out of hand.
Apart from wondering whether OPEC as a cooperative is ready to fracture, the market probably had little reason to expect anything other than the status quo, being more oil will be produced irrespective of the quota. Or will it? There are many who doubt whether Saudi Arabia really does have that much excess capacity, and what's more the stuff coming out of the ground now is heavier crude, not the light crude that most refineries are geared towards. Is that why the Arabs are angry?
Either way, Brent oil rallied US$1.07 last night to US$117.85/bbl and West Texas closed the gap a little with a US$1.74 jump to US$100.83/bbl. The price of oil is critical at present as the impact of high prices is really beginning to be felt in economic data, particularly in the US.
Yet the Fed is not too concerned, sticking to its expectation of a pick-up in the stalling US economy in the second half. That's why QE2 will be allowed to expire and at this stage there will be no QE3. How does Wall Street read that? We had this same dilemma this time last year. If QE is implemented it means the economy is sick (bad), but it is providing stimulus (good). If QE is not implemented (bad) it means the economy is not sick (good).
Well last night Wall Street wasn't really sure what to do. The indices chopped around all day failing to gain traction in either direction. In the Wake of Bernanke's speech on Tuesday night, last night the Fed released its monthly anecdotal assessment of the state of the economy in each of the twelve Fed regions, known as the Beige Book.
Given the weakness of recent data, one might have expected a tale of woe. But only four of the twelve regions reported slowing growth. Seven reported flat activity and one – Dallas – reported accelerating growth. This is a “downgrade” from the previous month and more negative than reports from earlier in the year, but it is not a disaster. It fits into Bernanke's declaration that the recovery is “frustratingly slow”. Slow, he suggests, but moderate nevertheless.
The main problem cited by the downbeat regions for weakness was either the weather (floods, tornadoes) or the Japanese earthquake (parts unavailable for autos and electronic goods). Neither of these factors suggest entrenched weakness.
Perhaps the clue in Wall Street's demeanor at the moment lies in last night's late move up in the VIX volatility index. Stock prices tried to rally mid-session but failed. Later in the session, traders didn't then go on another selling spree but they did buy put option protection, sending the VIX up 4% to almost 19. Wall Street is now more uncertain so rather than buy or sell, the plan is to cover one's Khyber just in case.
Once the forex market had absorbed Bernanke's speech, the clear indication of no QE3 was reason enough to buy the US dollar. The dollar index rose 0.5% to 73.92 last night. The Aussie has also continued to lose ground since the RBA statement on Tuesday which suggested almost a backflip from the central bank to a more dovish stance. It is down 0.9% to US$1.0626.
The US dollar rally sent gold down US$7.20 to US$1537.40/oz and silver down 1% to US$36.82/oz but base metals remain undecided, spending another night doing little on mixed moves. Oil ignored the dollar for reasons noted above.
Uncertainty also seemed apparent in the US bond market. If there is no QE3, meaning no Fed bond purchases, do you thus sell bonds? Or if the recovery is “frustratingly slow” do you park your money in bonds rather than stocks or commodities? The latter seems to be the case, given last night the ten-year yield fell 4bps to 2.96%. The Treasury auctioned US$21bn of the benchmark maturity and foreign central banks bought 51% compared to a running average of 48%.
The SPI Overnight was down 20 points or 0.4%. When will the bottom be found this time? Probably when everyone gives up hope of finding one. We must be getting close.
It's unemployment day for Australia today. Tonight both the ECB and Bank of England make rate decisions with the former being of most interest in terms of commentary. New Zealand also gets a rate decision today.
Rudi will be appearing on Lunch Money on Sky Business at 12pm.
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