Daily Market Reports | Nov 16 2011
By Greg Peel
The Dow closed up 17 points or 0.1% while the S&P gained 0.5% to 1257 and the Nasdaq jumped 1.1%.
US retail sales rose 0.5% in October against expectations of 0.2% and kicked on from September's 1.1% surge. The Empire State manufacturing index hit plus 0.6 this month, up from minus 8.5 last month to represent the first month of growth after five consecutive months of contraction. The producer price index fell 0.3% at the headline – its biggest drop in 20 months. The core rate fell 0.1% and economists had expected a flat result at the headline and a 0.1% gain at the core.
These data results were able to drag Wall Street's attention away from Europe last night but not immediately. The Dow was down 77 points at midday but managed to turn when news came through that Italy's prime minister to be, Mario Monti, has already secured himself a cabinet.
It has been noted that US hedge funds performed so poorly in the September quarter – having found the market so difficult to trade – that it's time to play catch-up. This means taking a risk and that risk is on the US economy showing signs of improvement as well as an assumption Europe can, and will, sort itself out.
If that's the case, then someone better tell the so-called “bond vigilantes”. After briefly dropping below the 7% mark on the news of Berlusconi's resignation, Italy's ten-year yield is rising once more and last night reached 7.3%. Not to be outdone, the rise in the Spanish ten-year yield continues to gather pace and last night it reached 6.6%.
For months now commentators have been warning European officials that if they don't bring Europe's debt problem to a conclusion, the markets will. Once again the markets are pressuring officials by implication – that implication being the longer you take to secure a leveraged EFSF the more we will assume you can't. Many a commentator believes the solution lies with the ECB. But to expand the ECB's balance sheet is to draw further on German funds, and that's why Germany is desperate to find another solution to EFSF leverage. But no one outside Europe wants to provide that leverage, and the IMF is not going to be the cash cow. That would require more funds from the US and others, and the US is struggling to even fund itself.
Two new governments in the eurozone do not a solution make.
The Dow managed to be up 87 points at 3pm but by 4pm it could only close up 17. Volume was yet again minimal. The intriguing point here is that last week the Dow fell 400 points on the day Italy's ten-year yield first shot through 7%. It's back there again, and now the Spanish yield is racing to meet it, but this time Wall Street doesn't seem to much care. Battle weary? Blindly optimistic? Hoping for QE3?
The latter is not beyond the realms, and the big drop in the October PPI is an interesting precursor to tonight's CPI release. If US inflation is weak, and unemployment remains elevated, in theory there's not much to stop Ben Bernanke ordering the presses to start rolling once more, except perhaps for those improving economic data. It's a fine balance, and the next FOMC meeting is not due till December 13.
The Dow has been largely tracking the euro of late but it didn't last night. The weaker euro had the US dollar index up 0.6% to 77.93. Risk players weren't sure what to do, so gold is little changed at US$1783.30/oz and the Aussie little changed at US$1.0196.
Commodities are also in limbo, with base metals once again mixed in London and Brent crude down only US15c to US$111.84/bbl. West Texas managed to rise US$1.30 to US$99.44/bbl, but part of that was related to rumours of a major oil spill off the Brazilian coast which Chevron later quashed. There was a brief leak but it's been successfully capped.
The SPI Overnight rose 14 points or 0.3%.
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