Daily Market Reports | Aug 12 2011
By Greg Peel
The Dow rose 423 points or 4.0% while the S&P gained 4.6% to 1172 and the Nasdaq jumped 4.7%.
History was made on Wall Street last night as the Dow closed up 400 points because never before have four consecutive sessions seen moves in excess of 400 points, let alone consecutively down and up. Even in 2008 the market found time enough to take the occasional breather. I've no idea what history tells us in percentage terms but I do know that in the dark days of 1929 the ticker machines were running several hours behind due to overwhelming volume, meaning no one much knew what had happened until it had.
Today we not only have instantaneous market updates readily available to all but we also have computers placing and withdrawing orders in microseconds and programmed algorithms that make the decisions, along with big players hiding transactions in so-called “dark pools” and mum&dad investors no longer spitting because they can't get their broker on the phone given they can trade on-line.
Volatility is most often prevalent in “thin” markets but despite some brief black holes both Wall Street and Bridge Street have fallen down into, and up into, this past week in intraday moves, volumes have been the heftiest all year and generally the heftiest since Lehman. So “thinness” is not the cause of the extraordinary volatility we are experiencing.
I would like to eventually see the numbers which determine how much of this week's activity can be put down to “high frequency trading” but the reality is HFT is not about size but about speed. The way I see it we have a large pool of cash which has been sitting waiting for a couple of years for “value” to emerge and a large pool of investments that have been bitten for a second time and just want to get out into cash. Views are polarised between those recognising that there is a lot less vulnerable leverage in the market this time around and those terrified of collapse in Europe and/or fearful of a recession in the US. This is what we call “a market”.
Normally in sharp up-days like last night there would be dismissive talk of mere short-covering, but last night a pick-up was noted in both “insider buying” (nothing illegal, just disclosed buying by executives of their own company's stock) and corporate buybacks, both of which suggest “value” views. Yet at the end of the day I just think there is a very large group who simply don't want to be either caught long, caught short, or miss out. The only certainty is uncertainty.
So why did the coin come up heads last night?
Rumours were unsurprisingly in the frame again last night. First of all the media outlet which first posted the “French downgrade imminent” rumour on Wednesday, with no source other than “a trader who wished not to be named”, apologised last night for their reckless journalism and withdrew the claim. And then another supposedly more substantive rumour surfaced last night suggesting European officials were considering placing a temporary ban on short-selling – as occurred in 2008 – in order to stem the sharemarket “run” on the European banks.
In a dose of reality, it was announced that German chancellor Angela Merkel and French president Nicholas Sarkozy will meet in Paris on Tuesday having each prepared plans for how ever the current crisis within the wider crisis can be addressed. Up until this week Merkel has been under constant fire from her opposition, the electorate, and even those within her own party over thought of providing further hand-outs to all those good for nothing Mediterranean types, but suddenly the complaint is now “why aren't you doing something?!”
Wouldn't want her job for all the dollars in China.
This news was taken positively, despite the fact anything that might arise not only has to be agreed upon by the eurozone's two most senior leaders, but also by the leaders of all the members and the seventeen member parliaments. Should be a piece of cake – not. Expectation is that the EFSF (European Financial Stability Fund) will be bumped up from a trillion to two trillion, or something like that, and if you pass Go you receive 200 euros.
Also welcomed early on Wall Street last night was last week's US jobless claims number, which showed a drop in new claims of 7,000. Are 7,000 people really worth 400 Dow points? Well, the point was that the fall took the total to 395,000 and 400,000 is considered the magic number between rising and falling unemployment. The total has not been below 400k since April and economists had expected an increase last week to 410k.
Let's not dwell on the fact weekly jobless claim data are notoriously volatile.
So it was all this “good” news which caused the coin to come up heads last night, and in fact with about half an hour to go the Dow was up 560 points. Usually a last minute, 100 point sell-off would be considered ominous but Wall Street was happy just to book the 423. While the sellers might be genuine, they might also be HFT computers who bought early and never carry trades overnight.
When stocks go up usually bonds go down, and this week has seen no less volatility in the US bond market as it has in the stock market. Early this week Ben Bernanke told the market short-end bonds will not fall in price for two years, so the world bought three-years in the Treasury's Tuesday auction with their ears pinned back, despite the fact Tuesday was an up-day in stocks. Wednesday was a down-day in stocks, but the world was not nearly as keen on the longer-dated ten-years the Treasury had on offer. And last night was an up-day, so it was not going to be that easy for Uncle Sam to attract lenders on a thirty year time horizon. America might be good for its short term debt at next to no interest, but where will the once mighty empire be in thirty years time? Demand at the auction was woeful.
Foreign institutions bought only 12% of the auction compared to a running average of 40%. I can't recall so wide a variation in recent years. Suffice to say the thirty-year yield jumped 25 basis points while the benchmark ten-year yield jumped 19bps to 2.34%.
The euro and the pound surged last night on the supposedly good news out of Europe, which should have seen the greenback trounced, but following a statement from the Swiss National Bank that it would be taking “drastic” measures the Swiss franc fell heavily. The US dollar index thus only dropped 0.3% to 74.56. Gold was an unsurprising victim although not materially so, falling US$27.80 to US$1767.60/oz. Silver lost 1.7%.
They loved it all in war torn London and when stocks go up, so do commodities mostly. Aluminium rose 1% but all other metals were up 2-4%. Oil was also up, despite being up on Wednesday too, with Brent rising US$1.34 to US$108.02/bbl and West Texas jumping US$2.77 to US$85.66/bbl.
And all of the above means “risk trade on”, so the Aussie is up a cent and a half to US$1.0339.
So – yesterday in Australia we closed flat as a tack despite the Dow being down 500. You can add that one to my list of “never been seen befores” as well. Does this mean we must also close flat today with the Dow up 400? We could look to the SPI Overnight, which was up 72 points or 1.8%, but then on Wednesday night it was down 99 points.
I'll toss, you call. Or better still let's just go to lunch.
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