Daily Market Reports | Dec 22 2011
By Rudi Filapek-Vandyck
The Dow Jones Industrial Average closed with a gain of 4.16 points, or 0.03%, at 12107.74, erasing a decline of as many as 104 points in the early afternoon.
The S&P500 added 2.42 points, or 0.19%, to 1243.72, but the technology-heavy Nasdaq Composite lost 25.76 points today, or 0.99%, to 2577.97.
Note today's advance by the Dow Jones Industrial Average keeps it in positive territory for the week, month and for the year.
There is a disturbing new trend in America, one that hasn't yet received a lot of attention because political processes and sovereign debt issues in Europe have been attracting all the headlines and daily attention, but guidances and results from US companies have noticeably started to disappoint. Yesterday it was Oracle's turn.
Business software bellwether Oracle's market update fell short of expectations, with management indicating it has become tougher to close deals. The shares tanked 14% in response and have been trading circa 12% lower during the overnight session. The flow-on effect on other technology stocks kept the Nasdaq firmly in negative territory the whole day, which made it difficult for the Dow and S&P500 to continue their strong rallies from yesterday.
And so it was that US equities opened the day weaker after Dow futures pre-opening had indicated an additional 120 points of gains was likely following Wednesday's big rally. After trading the whole day in the red, all indices put in a rally in the last 45 minutes or so with both Dow and S&P500 ending up with a narrow gain. The Nasdaq reduced its losses.
Note Oracle's disappointment was preceded by disappointments from Texas Instruments, Hewlett Packard and Inte,l which raises questions about the resilience of the sector as a whole when global economic growth is once again under pressure.
There was more positive news from the US housing market, with US existing home sales rising 4% in November. At November's sales pace, the 2.58 million unsold homes on the market represented 7 months’ supply – the lowest since February 2007 – a sign the backlog of inventory is gradually clearing.
US treasuries fell on Wednesday (yields higher) following the relatively upbeat data on the US housing sector. US 2yr yields rose 1pt to 0.275pct and US 10yr yields rose by 4pts to 1.972pct.
Earlier, European bourses failed to keep the positive momentum going, as the ECB's highly anticipated 3-year short term tender take up proved much stronger than expected.European banks took up E489bn worth. Investors and commentators are not quite sure how to interpret this. It does mean European banks are starved for liquidity and thus the move by the ECB is a positive, albeit with the caveat that things are obviously very dour.
Neither is there general agreement on what this increased liquidity pumping by the ECB actually means for the outlook of European banking and regional credit. Some commentators believe it will indirectly force bond yields lower, as banks are likely to recycle the fresh funds into easy gains through buying high yielding government bonds from Italy and Spain. Others don't think this will prove sustainable, given the fragility of balance sheets and the need for extra capital by these banks.
Whatever the case, yesterday the ECB was rumoured to be in the market buying Spanish bonds again. Note economists at National Australia Bank stated this whole operation amounts to, effectively, Europe trying out its own version of QE.
Meanwhile, Hungary's credit rating was downgraded and Fitch announced it was unlikely to downgrade the US of A's AAA rating before 2013, but the world's largest economy remains on negative credit watch regardless.
And the Bank of America will pay US$335 million to settle federal claims that its Countrywide unit discriminated against minority borrowers, according to US Justice Department officials.
Currency markets were pretty volatile overnight. The Euro fell from highs near US$1.3195 to lows around US$1.3025. The AUD fell from highs around US102.10c to US100.50c, and was near US100.70c in late US trade. The Japanese yen traded between JPY77.65 yen per US dollar and JPY78.10, ending US trade near JPY78.05.
Commodities were mixed, with LME metals directionless, gold taking a small step back (but still closing above US$1600/oz) and with crude oil adding gains. Nymex crude oil rose by US$1.43 or 1.5% to US$98.67 bbl and Brent crude rose by US$0.99 to US$107.72bbl.
Today's calendar is empty for Australia, but later in the US the leading indicators index and the final estimate of US Q3 GDP will be released.
SPI futures are indicating the Australian market will pretty much open today's session flat compared to yesterday. I think it'll be a mildly positive day.
Investors who are sick and tired hearing about banks, Europe, politicians and the US in combination with higher volatility in equity markets should maybe refrain from reading any further, because that's what analysts at US financial services firm Brown Brothers Harriman predict will continue to dominate the overall news flow and landscape in 2012.
In a nutshell: more and more of the same.
BBH has a view that, eventually, politicians and central bankers in Europe and in the US will find solutions that work and fix the immediate problems, but it's all going to take more time than we all would like it to. One could say the BBH view is the muddle through scenario. It carries the highest probability according to the firm and will, among other thinhs, translate into a stronger for longer scenario for the US dollar even though the firm's predictions are that, one year from today, most FX crosses will be largely unchanged.
BBH also believes China will remain robust, while conceding the risks are to the downside. Should worse case scenarios unfold, Chinese authorities will provide more stimulus more aggressively and save the economy from a hard landing. In the US economic growth will be around 2%, which is not enough to push unemployment down, but enough to keep inflation mild and deflation at bay.
The Federal Reserve will continue stimulating the economy to improve labour market dynamics, but QE3 will remain on the backburner. The euro will sink to US$1.20 as politicians fret and the ECB cuts interest rates to 0.50%, while Japanese authorities will be forced to intervene repeatedly to prevent the Yen from appreciating too much.
Emerging markets remain relatively robust, but they won't be able to escape the downward impact from troubles in developed economies. For Europe and Japan 2012 will mostly consist of the same, prolonged struggle, with lots of risks to the downside.
This may come as a surprise, but BBH clients have been advised to balance their investment portfolios in favour of equities, with not so much exposure to government bonds. BBH believes US equities in particular remain an investor's best friend, but concedes it will require extra-diligence and homework to avoid misfortune and disappointments in 2012.
One expert who fiercely disagrees with this view is Richard Russell, market analyst behind the dowtheories website and one of the deans of the global gold bugs community. Less than two weeks ago, Russell advised subscribers to his service to get out of equities and to do it without hesitation. A tsunami of bad news is about to hit the global financial system, is his prediction for the year ahead, and it will drag everything down from equities to commodities and much further than anyone dares to predict today.
Here's a direct quote from the missive released on December 14th: "I am warning all my subscribers again that we are back in the grip of a vicious and ruthless bear. The bear has been held back for almost two years, due to the so-called quantitative easing of an anxious and ignorant Fed. There's no bear angrier than a frustrated bear. As a result, I believe we're going to see a brutal stock market that will shock the Fed and the bulls and the public — and all who insist on remaining in this bear market."
Russell believes at times the gold market will feel the pains too as investors scramble to liquidate assets, but ultimately, once the dust settles, it remains his conviction that gold will stand tall as the last man standing.
Note to occasional readers of FNArena's Overnight Report: starting December 13th, I have used the daily Overnight Reports to line up diverging views and outlooks for financial markets and the global economy in the year ahead from experts both inside and outside Australia. In case you find it too unpractical to search for past reports in our archive (or you may not have the access), I will provide a summary in Friday's Overnight Report, which will be the final one for this year.
[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]
