Daily Market Reports | Oct 19 2011
By Greg Peel
The Dow closed up 180 points or 1.6% while the S&P gained 2.0% to 1225 and the Nasdaq added 1.6%.
It was a busy night on Wall Street of earnings reports, economic data, and finally on again-off again newspaper reports. The Dow was down 100 points early in the session, largely carrying on from Monday's reaction to Merkel's bucket of cold water.
We had learned the Chinese September quarter GDP yesterday in the Asian session which, at 9.1% year on year growth, was down from 9.5% in June and short of the 9.3% consensus forecast. Markets are jittery about a slowing China, and hence Australia reacted badly on what was already a weak day and Wall Street took the number on board with early weakness as well.
But how bad is 9.1%? It's hardly the stuff of hard landings. Beijing has been incrementally tightening monetary policy with the specific intention of reining in China's runaway growth while not crashing it, and one would have to say the plan is working. Let's not forget that Beijing's target growth ever since the GFC rebound has been 8%.
Soon the economic data and earnings reports began to flow on Wall Street nevertheless, and from there the market turned. Bank of America posted a very big earnings beat, although a lot of that was to do with the same accounting trick Citigroup pulled on Monday. BofA lost its “biggest bank” status to JP Morgan in the quarter, but the shares finished up 10% on the day.
A theme of all of the reports now in from JPM, Citi and BofA has been losses in the “investment banking” arms of the operations – trading, broking, underwriting etc – as opposed to the commercial banking businesses. It's not so surprising given the quarter's volatility and market weakness, and the same theme is also playing out for Australian banks and particularly Macquarie ((MQG)). It was expected that Goldman Sachs, which is not a commercial operation, would also suffer, and it did. Goldmans posted a loss for the quarter yet still managed a 5% share price gain on the day.
On the economic front, this month's NAHB housing market sentiment index surged to 18 from 14 last month to shock all and sundry. This index has been stuck in the low teens for months and months, economists had been expecting only 15 this month, and a result of 18 represents a seventeen month high. It also gave Wall Street a bit of a high, even though this is a 50 neutral index. Recent availability of cheap mortgages was credited which, if accurate, suggests the Fed's policy strategies are working.
The September producer price index came in with a 0.8% gain – significantly higher than the 0.2% expected. The result is a two-edged sword given that on the one hand healthy producer inflation is a sign of an economy not sliding into recession, yet on the other hand a lack of deflationary pressure makes QE3 less and less of an option.
On all of the above, the Dow was up about 100 points as we headed into the final and always most interesting hour. Then came the London Guardian's news wire bombshell. Germany and France had agreed, suggested the Guardian, that the E440bn EFSF should be leveraged up to two trillion euros. Yes – E2trn. That's about US$1.5 trillion, which is roughly double that of 2008's US TARP. And bang, the Dow was up 250 points.
For starters, why would Merkel calm everyone down on the Monday with warnings of over-optimism and then turn around on the Tuesday and announce the biggest ever rescue fund figure in the history of all mankind? Particularly when there appeared to be a forced news blackout out of Europe at least ahead of this weekend's summit? And so it was that the disbelievers started looking at the detail and saw that something was very wrong.
CNBC's European reporter made a very early call that E2trn seemed like a fantasy given commitments already in place for the EFSF that would limit its leverage to only E1trn. The Guardian suggested that of the E2trn, E100bn would be used to recapitalise Europe's banks. That's well short of the E200bn minimum the market feels the banks need, and as such potentially bad news. It also seems a very small chunk of the E2trn.
Wall Street quickly turned again, and then a report came in from rival news service Dow Jones that the Guardian had it “totally wrong”. The Dow then rocked and rolled to its close of up 180.
No one doubts that global financial markets are currently “headline driven”, and this was a fine example. Presumably some European official will now be forced to clarify or at least deny.
In the meantime, the euro was also a reactionary force last night and finished the New York session up having been down earlier, leading the US dollar index to fall 0.2% to 77.01. The Aussie still managed to put on a cent to US$1.0285. Gold was down around US$50 at one point in New York but rallied to close down only US$9.20 at US$1663.30/oz.
Any massive European rescue fund is a tough call for gold, given it removes a lot of the risk premium on the one hand but requires further substantial monetary inflation on the other.
Base metals had a quiet night for once, and were closed before the Guardian report, as was oil which saw a US99c gain for Brent to US$111.15/bbl and a US$1.96 jump in West Texas to US$88.34/bbl.
The SPI Overnight was up 55 points or 1.3%.
After the bell it was Tech Time, with all three of Intel (Dow), Yahoo and Apple reporting. In short it was thumbs up for the chip maker and global economic bellwether Intel (up 4% in the after-market), a yahoo for Yahoo (up 3%) and a rotten Apple (down 6%) with the man not yet cold.
Mixed fortunes there for the kick-off to tonight's session, but tonight we have American Express (Dow), Morgan Stanley, Travelers (Dow) and United Technologies (Dow). Along with the CPI and the Fed's Beige Book.
In Australia Westpac will release its monthly inflation expectations survey, which will be interesting for the RBA, while BHP Billiton ((BHP)) and OZ Minerals ((OZL)) will post September quarter results.
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