Daily Market Reports | Aug 02 2011
By Greg Peel
The Dow closed down 10 points or 0.1% while the S&P lost 0.4% to 1287 and the Nasdaq dropped 0.4%.
Investors who bought the Australian market up big-time yesterday will be disappointed with last night's response on Wall Street, no doubt expecting a solid gain on the debt ceiling news. Aside from passage through the House remaining a potential stumbling block, debts and deficits are really not the main issue at present.
As some once said, it's the economy stupid.
News on a compromise in the Senate did prompt Wall Street to open higher, by 140 Dow points, but a cloud remained over the possible response in the House. Suddenly that became academic, nevertheless, when the US manufacturing PMI was released. Let's run through the global round of manufacturing purchasing managers' index releases over the last 24 hours.
Australia's PMI crashed to 43.4 in July from a brief flirtation with expansion in June at 52.9. China's result matched the earlier HSBC flash number in falling to 49.3 from 50.1. Indeed the whole world slowed, with the eurozone falling to 50.4 (52.0), the UK to 49.1 (51.4) and then the big one – the US fell to 50.9 from 55.3 when the market had expected 54.9.
In June, the manufacturing sectors of all five regions were expanding, as was Japan's, but recovery from the earthquake is currently distorting that number. In July, only two of five regions expanded, and only by the barest of margins. And despite the fact the US manufacturing sector represents only 20% of US output, it is the world's biggest economy which still provides the biggest global impact.
On the PMI release, the Dow fell swiftly to be down 145 points by midday. The implication here is that the weak result was worth around 300 Dow points. But at that point news began to filter through of expectations that the House would indeed pass the new debt ceiling deal and finally end the charade, at least for the time being.
I have noted previously there appears to be a cohort of buyers prepared to pick up potential bargains at these low levels. Clearly they were behind Wall Street's ultimate recovery almost to flat last night. Optimists point to the US quarterly result season, now all but over, in which 74% of S&P stocks beat expectations. The US$100 per share earnings result for the S&P 500 is a record. The pessimists, however, ignore the micro and point to the macro – that being recent economic data of which last week's GDP and last night's PMI are stark indicators. There is another cohort, apparently, ready to sell into any decent rally of the debt ceiling lows.
But then again once we presumably get through all this debt business focus can return to the Fed, which has been deathly silent through the whole process, and the prospect of QE3. Ben Bernanke has stated emphatically in the past that it is not up to the central bank to carry the burden alone. A fiscal response is also required. But the fiscal response is one of austerity under the debt ceiling deal, and the aforementioned pessimists point to budget cuts as being another reason why one wouldn't buy stocks at this point. What will be the Fed's response?
Is there a “free” market operating here? It doesn't much look like one. Little wonder, therefore, that FNArena's recent investor sentiment surveys have noted average cash holdings in portfolios in excess of 20%, which is a long way from the 5% or less of your typical “balanced” portfolio. That cash is either sitting and waiting for any eventual opportunity to buy, or simply sitting safely for the time being. How does one try to second guess the puppet masters in Washington, Brussels, Tokyo, Beijing, and even Canberra?
European markets also took quite a pounding last night. They had also opened strongly on debt ceiling news and then crashed on the US PMI release, but also accelerated to the downside when Citigroup stock analysts cut their ratings on all Italian banks.
This allowed the US dollar to rally by 0.8% to 74.30, despite the dollar hitting a fresh high against the Swissy and almost against the yen. The Aussie is only down 0.2% to US$1.0979. Gold understandably fell last night, by US$6.90 to US$1620.30/oz.
Base metals had little to argue about. A higher US dollar and weak PMIs saw all metals fall 1-2% including silver. West Texas crude fell US81c to US$94.89/bbl but Brent, which has its own supply issues, was relatively steady at US$116.81/bbl.
If we needed some hint that QE3 might be just around the corner, or at least anticipated, we can look at US bonds. The ten-year yield fell another 7 basis points to 2.74% last night. It makes sense that bonds should be bought on a debt ceiling resolution, but then again they were never sold off when the issue was in doubt.
And what of the poor old trigger-happy Aussie market? Yesterday the woeful PMI was ignored in the exuberance of potential debt ceiling resolution, but that now looks like a mistake. The SPI Overnight certainly thinks so because it's down 73 points or 1.6%.
By the close of Wall Street, it was understood that the House will be voting on the new deal tonight and that confidence was rising that it would indeed pass, and thus end the impasse. The question is as to whether ending the dispute is more valuable in stock terms than the weak economy. And then for Australia, there's a small matter of interest rate policy.
ANZ economists were on the nightly news last night suggesting that a resolution to the US debt ceiling issue prior to today's RBA meeting would be enough to cement a rate rise today. With that point of global uncertainty removed, and another solid monthly inflation reading from TD Securities, ANZ cannot see how the RBA can hold off.
But what of the PMI shocker, and also the housing sales shocker yesterday? Can the RBA seriously put the boot further into Australia's manufacturing sector, and into mortgage holders, while non-mining economic activity is in recession, house prices are falling, and the Aussie is hanging on to 1.10?
We shall know at 2.30pm today. At some point prior, one presumes, we may see the debt ceiling bill passed through Congress.
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