Daily Market Reports | Jun 10 2011
By Greg Peel
The Dow closed up 75 points or 0.6% while the S&P rose 0.7% to 1289 and the Nasdaq added 0.4%.
Wall Street had begun to look oversold, and history suggests that periods of seven down-days in a row are very rare. Still there needed to be some catalyst amidst the gloom of recent economic data, and it came in the form of the April US trade balance.
The US trade deficit reduced by 6.7% in April or 11% in real terms to US$43.7bn, down from the two-year high set in January of US$49.7bn. Economists had expected an April result of US$48.0bn. The deficit was reduced due to a record export result which was matched by only a slight increase in imports.
While the numbers seem insignificant compared to over a trillion in government debt, any data indicating an easing of the budgetary debt burden is welcome at this stage. Wall Street certainly loved it, and by midday the Dow was up around 130 points. We just won't mention the fact that the low import growth result was heavily impacted by missing regular imports from quake-ridden Japan. Wall Street will take anything at this point.
The euro was also weaker on the session after the ECB left its cash rate unchanged at 1.25%. Traders were not expecting the central bank to raise this month but they have been expecting a July hike instead, so when Jean-Claude Trichet suggested that “strong vigilance” is required in the fight against inflation traders knew a July hike is now confirmed. “Strong vigilance” is well known code for “rate hike next month”.
But Trichet went on to suggest that inflation pressure would moderate in 2012 which traders took to mean the July hike would be the last for some time. The ECB also said it would extend the unlimited loan facility to European commercial banks at emergency rates through to the end of the third quarter, which is a nod to the Greek problem. The ECB remains defiant that it cannot accept Greek sovereign debt as collateral if that debt is restructured, which is what Germany is insisting must happen. It's a stalemate, but at least the market knows something will happen to prop up Greece again, one way or another.
The end result was a US dollar index up 0.4% to 74.19. Despite the stronger greenback and a weak Australian jobs report yesterday, the Aussie is steady at US$1.0634.
While a stronger US dollar might have been expected to offer some relief on the commodity price front, it didn't. The oil market is still reeling over Wednesday night's OPEC disagreement and stalemate which led to no increase in production quotas. Traders fear the failure to lift the quota to counter too-high oil prices is indicative of a lack of spare production capacity across the OPEC member states, rather than simple petulance.
The US government has now indicated it might release oil from strategic reserves if the oil price becomes a major problem, which is just what they said last time oil was at its highs before the speculative bubble burst. While the release of reserves should, in theory, mean weaker oil prices in anticipation, last night the opposite was true. Brent rose US$1.72 to US$119.57/bbl and West Texas rose US$1.13 to US$101.87/bbl. Oil prices rose because of the double-bluff effect. If the government is ready to release reserves that implies the government also fears a lack of global spare capacity. Ergo, the demand/supply equation suggests the oil price must go higher.
Base metals still don't know what to do at this level and were again mixed on small moves last night, with the exception of a 2% jump for nickel. Silver also jumped 2%, to US$37.57/oz, after the World Silver Council declared industrial demand for silver is growing which should mean prices are underpinned. Gold followed with a US$6.90 rise to US$1544.30/oz.
After two well received bond auctions this week the US Treasury couldn't drum up as much interest for its US$13bn auction of thirty-year bonds last night, albeit the settlement yield of 4.238% was the lowest since October. At that level, and that maturity, it's not such an attractive bet. Foreign central banks bought 38% compared to a 41% running average.
All was looking a lot rosier on Wall Street at 3pm when the Dow was still sitting on its high, up 133 points. But alas, last-hour selling ensued from the non-believers, or maybe just from the day-traders, and the close of up 75 was a little less convincing. But a rally is a rally, and talk now is of whether stocks had simply been sold too far. We must await further economic data.
The SPI Overnight rose 21 points or 0.5%.
China releases its May trade balance today.
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