Daily Market Reports | Sep 13 2011
By Greg Peel
The Dow closed up 68 points or 0.6% while the S&P gained 0.7% to 1162 and the Nasdaq jumped 1.1%.
Australian exports to China are up 35% in 12 months, it was revealed yesterday after another solid trade surplus was announced. Exports to South Korea are up 27% and to Japan 23%. Why, then did the Australian stock market post its worst session in two years yesterday?
One can argue whether the selling came from onshore or offshore and whether it was led by humans or computers, but the simple answer is fear. As to whether that fear is substantiated is not important at present given the rational investor can just as easily end up broke if all about are being irrational. Fear begets fear, and in such circumstances it's safest to run to the sidelines and let everyone else panic.
What would transpire if Greece defaulted? Credit default markets have already priced in a 96% chance so one could hardly argue an “out of the blue” scenario. Greece's economy is smaller than that of California's. One thing that seems clear at this point is that Greece is not about to be kicked out of the eurozone, nor is it about to leave. Eventually the powers that be may come to the conclusion that the best solution is to get the default over and done with and worry about shoring up European banks in order to head off a credit freeze as occurred at the time of Lehman. It is important to remember that Lehman led the world into effectively new territory and no one then knew exactly what to do. This time around the response should be clear.
Of course it requires some political leadership – something which has been absent in Europe all this time. But there would be much greater support, right down to European taxpayers, for letting Greece go bankrupt than there would be for coughing up more emergency funding that has so far had zero effect. The ability to go bankrupt is also a fundamental element of the free market system.
It was reported on Friday that Germany is readying itself for such an outcome. No doubt the G7 finance ministers were talking contingencies over the weekend. Last night Moody's proved yet again that ratings agencies are no part of the solution whatsoever but dangerously part of the problem as it was rumoured downgrades to French banks are nigh. Fortunately very few people or institutions in the world afford ratings agencies any credibility anymore, and as usual a downgrade of French banks would be a “miles behind the curve” move. But every piece of bad news adds incrementally to the fear, and that's where we are at present.
It was a choppy ride on Wall Street last night as stock indices opened to the downside and then rallied back to the flatline before falling again. Barclays posted a report lowering its end of year forecast for the S&P 500 by 10%. This took the target down to 1325 from 1450.
I mean really. On last night's close, Barclays analysts are effectively saying they no longer believe the US stock market will rally 25% in three and a half months, only 14%. And that was basically enough to send the Dow to its lows of down 168 points. It's exactly this sort of idiotic response from investors which has turned the likes of Warren Buffet into a billionaire.
But then London's Financial Times published a story suggesting Italy was in discussions with a Chinese sovereign wealth fund to buy Italian bonds. Wall Street bounced about a hundred points. Then someone pointed out it was just a rumour, and a bit of a dodgy one to boot given Italy has a rather large bond auction on tonight, and indices head back towards their lows. Then the FT republished the story with greater confirmation and the short-covering race was on.
You'd never approach a madman holding a knife, which is why you shouldn't go anywhere near this market at present. China was talking to Italy about buying bonds at least two weeks ago. It makes perfect sense, assuming China has faith in Italy surviving (there's no news of China visiting Athens) given China is desperately looking for somewhere else to park its foreign reserves other than in US Treasuries. And with Rome on its knees, no doubt Beijing should be able to extract a pound of flesh. Maybe take a large stake in Italy's vast pasta plantations or something.
The news was enough to send the Dow up nearly two hundred points in a bit over half an hour to the closing bell. The VIX volatility index hit 43 last night, which is hardly a surprise, before closing at 38.
You know panic has set in again when, under such circumstances, the price of gold falls substantially. Last night gold was down US$44.20 to US$1814.20/oz as investors raised cash to cover margin calls in other assets. Base metals, on the other hand were relatively mixed on smallish moves while Brent oil fell US52c to US$112.25/bbl and West Texas rose US$1.68 to US$88.92/bbl.
A scheduled auction of US three-year bonds resulted in the lowest settlement yield in history at 0.33% while in early trade the ten-years hit an all time low of 1.87%. Selling moved in later in the session to leave the benchmark yield up one basis point at 1.93% by the close.
The euro continued its slide in the European session but it, too, spun on the Chinese news and actually closed higher, sending the US dollar index down a tick to 77.13. The Aussie has been crunched another cent to US$1.0347 following yesterday's offshore selling of local stocks.
Yesterday on the local market was very much one of “stand aside”, and last night's news – whether worthy of response or not – has as least set a temporary bottom. So the SPI Overnight is up 41 points or 1%.
Is it the bottom? I very much doubt it. The August low in the ASX 200 was 3986 and yesterday we closed at 4038, while the equivalent low in the S&P 500 is 1120 and last night the intraday low was 1136. Those lows will now be support levels, but if breached will trigger more selling. I have been saying since August that the first low is rarely the last low before a market actually turns. I will say, however, that gold selling is a good sign that a capitulation point is approaching.
How did Australian businesses feel about the turmoil of August? We will find out today when NAB releases its monthly business sentiment report.
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