Daily Market Reports | Jan 27 2012
By Greg Peel
Wednesday night: Dow up 81 points or 0.6%, S&P up 0.9% to 1326, Nasdaq up 1.1%.
Thursday night: Dow down 22 points or 0.2%, S&P down 0.6% to 1318, Nasdaq down 0.5%.
Because there was no Overnight Report yesterday as Australia celebrated "Australia Day" we combine two days into one Report today. First we start with Thursday, then we move on to this morning.
Thursday:
The patriotic declaration that “America is back,” made by President Obama in his State of the Union address on Tuesday night, was still resounding when on Wednesday night Fed chairman Ben Bernanke reiterated in his first monetary policy statement for 2012 that the US economy remains “fragile”, and that it's still too early to say strong growth is here to stay. The new year has seen improving US data combined with an easing of fears over Europe which has driven a solid rally on Wall Street.
One might have expected such a statement to be accepted like a bucket of cold water but the opposite was very much true. Were the Fed funds rate to be in the positive and not zero as it is, Bernanke would have provided a rate cut. Instead he declared that the (as good as) zero interest rate, which he had previously pledged to keep in place until 2013, will now be kept in place until 2014.
Such a pledge represents a form of monetary stimulus sitting in between cutting rates and quantitative easing. The Fed ceased expanding its balance sheet mid last year but has maintained its size ever since with reinvestments. In addition to the new 2014 deadline, Bernanke added that the Fed would not begin selling bonds – unwinding QE2 – until 2015. He did not rule out the possibility of QE3, and commentators suggest that the new 2014 deadline makes QE3 more possible now than it was last year.
The Fed's policy move basically equates to the RBA's two rate cuts in November and December. They were made possible by the sluggishness of Australia's non-mining economy and the easing of inflation risk, and made necessary by the risk offered by the European crisis. The US economy is also positive but sluggish, and the same European risk applies. The Fed is being proactive, which is not surprising when we recall that last year the US central bank pledged to support the euro with currency swaps if necessary – something that had not been done since Lehman fell in 2008. Around the globe, safety nets are being put in place.
In the context of recent years, the response of an 81 point rally in the Dow seems rather meek. But while previous rate cuts and quasi rate cuts were made when markets were weak and threatening to weaken further, this time the US stock market has rallied 20% from the October low. Prior to Wednesday night commentators had begun to warn that over-complacency had set in and investors might do well to ease off. It's thus not surprising that this “rate cut” was not met with a triple digit response.
The big winner on the night was gold which, in the face of what amounts to further monetary inflation, rallied US$42.60 to US$1708.90/oz. The US dollar index fell 0.5% to 79.49 as the euro hit US$1.31. The Aussie added a full cent, to US$1.0601.
The effective US dollar devaluation also sent base metals higher, up 1-3% across the spectrum. Only oil, which is stuck in a no man's land situation at present, failed to join the party and Brent fell slightly to US$109.81 while West Texas rose slightly to US$99.77.
The SPI Overnight rose 12 points or 0.3%.
Friday:
While Wall Street was adding more “risk on” in response to an even more robust Fed safety net, the stalemate continued in Athens. Aside from the 3.5-4.0% gap between borrowers and lenders which had bogged down proceedings last week, the private sector holders of Greek bonds are now asking why the public sector holders aren't being made to take the same haircut. Fair point, one might say, except that the “public sector” in question is the ECB. The ECB has been buying distressed sovereign paper ever since the crisis began and is thus now a large holder. The ECB was buying Greek bonds in its role as “last resort” central bank and not as a “punter”. Were the ECB forced to take a 70% haircut on its holdings one would be forced to say “what's wrong with this picture?”
The ECB has bought Greek bonds to support the eurozone financial system and thus the European banks. Those European banks now expect the Fed to take a hit on the investment, thus reducing the pool of funds available should the European banks still need to be saved. Madness. Mind you, it was the ECB which entreated European banks to buy eurozone sovereign bonds in the first place.
Wall Street continued to rally from the bell last night. Weekly jobless claims remained below the 400,000 mark, December durable goods orders rose 0.3%, and the Conference Board leading economic index from December showed a 0.4% rise following a 0.2% rise in November. Dow component Caterpillar, which has been an outperformer for many quarters thanks to sales to China, posted a Street-beating earnings result. All was good, and then in early trade the Dow passed 12,810 to mark a new 52-week high, breaching the level last seen in April, to be as high as it has been for three and a half years.
Does it all seem a bit too complacent? Whether or not the high mark was a trigger for profit-taking, or whether a weak result in new home sales was the impetus, Wall Street turned around from that point and began drifting lower. Volumes remain very weak.
New home sales in the US fell by 2.2% in December. For the year 2011, new home sales fell 6.2% to a seasonally adjusted average of 302,000 – the worst year on record. Ben Bernanke made special mention on Wednesday of the stagnant US housing market as justification for his new policy measure.
Wall Street had already began to retreat ahead of the close of the London Metals Exchange, but enthusiasm there was not dampened. US dollar devaluation was again the focus as all metals rose around another 1-2% except tin which surged 5%. When it's “risk on” time the commodity funds come barrelling back in again and that always has traditional traders worried about over-stretching. Oil was also popular last night, with Brent rising US$1.02 to US$110.83/bbl and West Texas adding US36c to US$99.76/bbl.
Currency movements were relatively minor last night, with the US dollar index ticking down to 79.43 and the Aussie ticking up to US$1.0622. Gold found further buying support nevertheless, rising another US$12.40 to US$1731.30/oz.
The SPI Overnight fell 2 points, implying a net gain over two sessions of 10 points.
LME traders are awaiting the return of the Chinese from their week-long holiday next week before deciding whether base metals are now overbought. Commodity price rises and US dollar devaluation are clearly playing havoc with the Aussie, which brings the RBA rate decision, not due till February 7, into focus. At the moment everything across the Pacific is looking healthier, yet Bernanke has decided more stimulus is needed. Should this move in itself be enough for Glenn Stevens to follow suit? After all, we're still waiting on Greece and each day that passes renders an orderly solution less clear. And that Aussie is just adding more and more pain to the Australian economy, yet consensus already has Stevens cutting so there may not be much of a reaction.
Tonight sees the release of the first estimate of US December quarter GDP. Consensus is for 3.0% growth following 1.8% in the September quarter.
ResMed ((RMD)) will release its six-month result today.
[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.]
