Daily Market Reports | Sep 29 2011
By Greg Peel
The Dow fell 179 points or 1.6% while the S&P dropped 2.1% to 1151 and the Nadaq lost 2.2%.
After a couple of strong sessions in global markets the risk was always that the euphoria would wane between Eurotarp proposal and delivery. We know full well that Europe never does anything expediently, hence to propose a Eurotarp or something like it is one thing, but to actually reach agreement amongst all members on its form is very much another. The longer it takes, the more impatient the market will become.
There was not much going on in last night's episode of In Europe Tonight other than a positive vote for the EFSF in the Finnish parliament. This is not insignificant given Finland is the one member causing problems with the proposed second bail-out fund for Greece by demanding collateral against its contribution. The EFSF is another matter nevertheless, and we have to get that established before it is decided what to do with the E440bn, with the current proposal being to leverage it up into a Eurotarp. It is probable that what transpires will negate the proposal for a second Greek bail-out fund anyway.
Germany, Austria and Slovenia will all have voted on the EFSF by week's end leaving another half a dozen members yet to do likewise, and when that's bedded down (assuming it is) only then can we move on to the next round of votes on the Eurotarp or whatever we end up calling it. In the meantime, it's going to be very hard for global markets to maintain the faith.
Which is why plenty of traders and fund managers interviewed in the media this week still insist the best short-term tactic is to sell into any rallies. Many suspect a bottom is not that far off now but they do not believe we have seen it yet. Such an attitude would explain why Wall Street gave up half its rally late in Tuesday night's session and also why last night, despite opening 127 Dow points higher, Wall Street was trashed at the death.
There is another factor in the mix. The dominant focus on Europe in past weeks has taken the spotlight well and truly away from China, although we know that Europe is China's biggest export market. A slowing in global growth, led by likely recession in Europe, can only impact on China's export industry. Of course in 2011 it is China's domestic economy for which the world holds high hopes, but contraction in exports must flow through to activity and spending locally.
Yesterday the Shanghai index breached the low it formed in mid-2010. This event was not lost on Wall Street traders as the opening bell rang last night. China's stock market is down 24% from its previous peak in late 2010. If there is one reliable proxy for the Chinese market, it is the global base metal bellwether – copper. Of all the metals and minerals, copper is the most significant to China's urbanisation and industrialisation revolution given its role as a conductor of electricity. And it is no less important in the manufacture of fridges, televisions and so forth for the export market.
At the kerbside close of the LME last night (the last trade), copper was down 7%. Metals markets have clearly been volatile this past week but copper, given its dominant trading volumes, is usually not as volatile as your nickels, tins or leads. Yet last night copper led a general base metals sell-off (coming in the wake of a very positive session the night before) as aluminium fell 2%, led 3%, zinc 4%, and nickel and tin 5%.
Silver has also been copping it lately, given it is losing out on both fronts. As a precious metal and store of wealth, it has followed down gold. As a base metal for industrial use, it has followed down the LME. Silver traded close to US$50/oz in April and fell 6% last night to under US$30/oz.
Gold fell US$40.70 last night to US$1608.80/oz as it once again became a source of cash as the US dollar index rose 0.4% to 78.03. The Aussie commodity currency has fallen one and a quarter cents to US$0.9779.
Oil had a very strong session on Tuesday night on general euphoria but gave it all back last night. Brent was down US$3.33 to US$103.81/bbl and West Texas fell US$3.83 to US$80.63/bbl.
With commodities feeling the pinch as markets contemplate the ramifications of slower global growth, it was the materials sector which led Wall Street lower last night. The official Chinese manufacturing sector PMI is due out on Saturday and Wall Street traders suspect someone in China had the jump on the number, explaining the weak trade in Shanghai yesterday. We know, of course, that HSBC's “flash” PMI published last week showed a slight dip as the index struggles just below the expansion level, so realistically official confirmation should not be too much of a surprise.
But it's enough to test the frayed nerves of traders around the globe.
We mustn't forget that we still have an economic data flow outside of Europe and China, and last night the US durable goods orders release showed a drop of 0.1% in August when a rise of 0.4% was expected. Economists were comforted, however, given the difference was all in the lumpy transports. Orders across other industries otherwise grew.
Tonight in the US sees the final revision of the June quarter GDP. Final, that is, until it is revised again (possibly wildly) on the release of the first estimate of September quarter GDP late next month. At this stage economists are expecting the final Q2 revision to show 1.2% growth, up from 1.0% at the previous revision.
The SPI Overnight fell 58 points or 1.4%.
Rudi will be appearing on the Sky Business channel today at noon.
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