Daily Market Reports | Jun 12 2011
By Greg Peel
The Dow fell 172 points or 1.4% while the S&P dropped 1.4% to 1270 and the Nasdaq lost 1.5%.
So much for a bounce. Wall Street opened lower and continued to slide on Friday night, culminating in the Dow falling through the psychological 12,000 level. The Dow was down 187 points to 11,937 at 2pm, tried to rally back to the 12,000 mark, but lost it at the death. Wall Street thus completed its six consecutive down-week. If a seventh is added, it will be the first time since the 2001 tech-wreck.
China was blamed as the main catalyst for the sudden return to weakness on Friday. Wall Street had been mostly concerned about the weakening US economic recovery, but soothing words from the Fed had traders contemplating whether the correction might have run its course. Yet Wall Street also knows that the fate of the global economy is in the hands of the Chinese.
China's trade surplus rose to US$13.05bn in May from US$11.4bn in April when economists were expecting a jump to US$19.8bn. Exports grew by 19.4% year-on-year compared to a 20.4% expectation, down from 29.9% in April. The conclusion here is that China is struggling to sell goods into a faltering Western economic recovery, and the world is relying on China to buy raw materials to keep the global economy ticking over.
Yet imports rose 28.4% compared to 21.8% in April and a 22.0% expectation. If this is a reflection of China's domestic economy taking up the baton from its export economy then the news should be good. However, Goldman Sachs argued that the May import data were skewed given a lower base in last year's numbers and that internal demand is not strengthening as it might appear.
The data stoked more fears of a Chinese slowdown, adding to the “Groundhog Year” effect. Never mind that Beijing is still trying to slow its economy, down from the first quarter rate of 9.7% growth to something closer to 8%. And never mind that in the longer term, the world wants a correction in the global imbalance and that means the US turning a trade deficit into a surplus and China turning a trade surplus into a deficit, suggesting China takes over the role of biggest global consumer. In the short term, Wall Street wants to see the US consumer powering along and China selling more exports to satisfy demand.
Such a view is jingoistic, mindless, and destructive. But unfortunately it drives Wall Street.
Adding to global economic fears was the UK industrial production number released on Friday night which showed a fall of 1.7% in April. That's the biggest fall since August 2009 and much bigger than expected. Economists blamed the Japanese earthquake as well as the extra holiday for That Wedding, but it doesn't seem anyone's much in the mood at the moment for explanations. The FTSE was down 1.6%.
And then there's the perennial Greek issue, and talk about your Groundhog Year here. Not the fact that Greece is again in the spotlight, but the fact that the various euro-powers can't reach an agreement on what to do about it. Germany wants a restructure, but the ECB says under its rules it cannot accept Greek sovereign collateral if it is restructured. The euro fell over 1% on Friday to US$1.4354, and at the moment Wall Street is correlated to the common currency. The US dollar index rose 0.9% to 74.83.
The dollar bounce added to the general concerns over weakening Chinese exports in sending commodity prices south. Gold fell US$12.20 to US$1532.10/oz, silver fell 4% to US$36.20/oz, and all base metals fell 1-2%.
And in the oil market, concerns were heightened with confirmation that Saudi Arabia would go it alone on increased production levels in the wake of the collapsed OPEC meeting. West Texas fell a full three dollars to US$98.92/bbl. But then strangely, Brent fell only US79c to US$118.78/bbl.
Perhaps the disparity, which now means the Brent-WTI spread has blown out to a further record of nearly US$20, can be put down to the fact any excess oil produced by Saudi Arabia will be “sour” and not “sweet”. Most refineries are not set up to cope with the heavier, higher sulphur Saudi oil and hence it is not really an immediate substitute for Brent, or for sweet Nigerian oil also favoured in Europe. But then nor is it a substitute for West Texas, so Lord only knows what goes on in the minds of Americans. The energy sector copped it on Wall Street on Friday night, all based on West Texas. Make up your own mind.
The Aussie dropped a cent to US$1.0537 and the SPI Overnight was down 44 points or 1.0%.
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