Daily Market Reports | Sep 01 2011
By Greg Peel
The Dow rose 53 points or 0.5% while the S&P gained 0.5% to 1218 and the Nasdaq added 0.2%.
August is over. Hallelujah, pass the valium.
August 2011 has seen the S&P 500 close down 5.7% for its worst August in a decade. With a greater loading of defensives, the Dow is down 4.4% and managed to close last night up 0.3% for 2011. The month saw more 400 point Dow-swings than ever before in history. Stop the world, I want to get off.
European debt, US debt and double-dip, and a slowing China all conspired in August to provide the mayhem. The ultimate driver of the global economy – the US consumer – recorded a confidence measure of 44.5 this month. Excluding March 2009 (27), the last time this measure has been as low was December 1974.
According to data accumulated by Goldman Sachs, the first two weeks of August saw US$35bn of selling out of long positions by US investors, which is a record. The third week of August saw US$15bn of short positions established, which is a record. US mutual funds saw US$43bn of outflows in August, which is the third largest amount on record. Excluding the nightmare of the Lehman collapse aftermath, August 2011 has been the scariest month ever in the memory of most. October 1987 was a shock, as I recall all too well, but it was all over in a flash by comparison.
But spring is sprung and the grass is riz this morning, at least in Australia. In the rest of the world, where spring does not begin on the day the British marines in the colony were allowed to change into summer uniforms, the spring equinox is still three weeks away. A new month is nevertheless upon us, and that provides a psychological benefit as well as decision time for fund managers and investors. September is actually, on average, the worst month of the year for stocks, but then we might have had our September in August this year.
It was still the last day of the month in the US last night and Wall Street opened with a flurry, with the Dow up 153 points from the bell. Inspiring the jump was some good news out of Europe.
According to reports, the German government has secured the support it needs among coalition parliamentary members to pass the bill required for the expansion of the European Financial Stability Fund, and the cabinet is firmly behind Chancellor Merkel. There remains the issue of collateral demands from some eurozone governments, but one assumes that if Germany passes the bill then other members will fall into line.
It's still an assumption, and there's a way to go yet as seventeen governments put the bill to their parliaments, but had Merkel failed to win support for the bill the likely result would have been a collapse of the German government and, subsequently, global markets. If we assume that is not now going to happen, it's one positive for the new month.
Also spurring Wall Street on to a strong open last night were the session's economic data releases. July factory orders rose 2.4% when 2.0% was expected. The Chicago purchasing manager's index fell only to 56.5 from 58.8 this month when 51.0 was expected. And the ADP private sector employment measure showed that 91,000 jobs were added when 100,000 were expected.
Hang on – that last one's the wrong way round. Employment is the most important factor of all, and this result suggests disappointment on Friday when the non-farm payrolls are released. Ah but don't forget we are now in a “good news is good news and bad news is good news” phase because Uncle Ben has our backs. If the US economy shows further signs of deterioration, we will see some form of QE3.
That safety net is enough to suggest that we can't see another big market plunge in the near term. If Europe can really get its act together – and the German news is a positive step – then there may not be a readily identifiable trigger for a plunge. Today and tonight bring manufacturing PMI data across the globe, and expectations are for weakness, but we know from the HSBC flash number earlier this month that China's PMI has stopped falling, and that's a good sign.
In fact, everything in this Report so far has been a positive sign. That includes the data noted by Goldman Sachs, because as Goldmans points out, they are all positive contrarian indicators.
In the past 50 years, every time the US consumer confidence index has plunged to a level of “extreme pessimism”, the next 12 months have provided “spectacular” stock market returns, notes Goldmans. And as noted, a reading of 44.5 is as low as that index has ever been bar the extremes of March 2009.
While this indicator may be “contrarian”, the logic is straightforward. Everyone gets so depressed and so scared that they capitulate, sell and go and hide behind the couch. At the point of capitulation, the market is “oversold” and there's just no selling left. Indeed if the news turns positive, everyone is very much the wrong way around. This means a very good chance of an ensuing scramble to the upside. As the data from Goldmans above indicate, Wall Street is as good as “record short”.
Take that thought on board as you sniff the jasmine.
The early rally on Wall Street nevertheless did not hold last night, and we were flat again by 3pm. But the buying returned at the death. As I suggested yesterday, you can't read too much into end-of-month moves. Tonight and Friday night will be more interesting, given manufacturing and unemployment data.
Markets elsewhere were relatively quiet last night. Currencies were steady with the US dollar index at 74.13 and the Aussie at US$1.0695. Gold fell US$11.30 to US$1824.40/oz and base metals were all up around 1%. Brent oil rose US83c to US$114.85/bbl and West Texas fell US18c to US$88.72/bbl. The US ten-year bond yield rose 5bps to 2.23%.
The SPI Overnight took a big sniff of jasmine and jumped 30 points or 0.7%.
The Australian result season is over – woohoo! (The past three weeks are FNArena's busiest for the year.) There will be plenty of analysis ahead of what has been a mixed bag. As noted, it's manufacturing PMI day today.
Rudi will not be making his regular appearance on Sky Business today due to other commitments. (He will be presenting at the AIA Conference in Sydney today. The title of his presentation is "El Revolucion" – should be interesting).
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