Daily Market Reports | Mar 15 2012
By Greg Peel
The Dow closed up 16 points or 0.1% while the S&P lost 0.1% to 1394 and the Nasdaq was steady.
The Dow was up as many as 44 points early in last night's session but there met market indecision before drifting around towards the close. It is not unusual to have a quieter day after a big up-day but the indecision reflects a diversity of opinion in the market now that this magic Dow 13k level has been conquered. The bottom line is: If there is no QE3, is that good or bad?
On face value you'd have to say that if the central bank does not need to further debase the currency to save the economy then that should be a good thing. But others were banking on QE3 to keep the momentum going, and many worry that while Europe has gone quiet for now, the next storm may not be far off. Could we have another Sell in May year? Many are worried that US equities have run too far, too fast.
When Europe was threatening to implode late in 2011, the euro tanked and sent the US dollar index rushing up to 82 in January. The subsequent apparent resolution of the eurozone's immediate woes has seen a recovery in the euro and a resultant pullback in the dollar. But the easing of European fear has a lot to do with the unlimited amounts of fresh cash the ECB is pouring into the European system. By contrast, the Fed has now implied, by omission, that QE3 is off the table.
Japan is nevertheless stepping up its QE, as is Britain. If the three major currencies in the US dollar index are being further debased, and the dollar is not, then the only way the dollar can go is up. Which it has all month, last night adding another 0.4% to 80.56.
This time the rise in the dollar is being supported by US economic improvement, rather than simply by the threat of recession in Europe. As such, the dollar rise is more grounded, and global markets have begun to take notice. Perhaps the most obvious point of focus is gold.
After a big fall on Tuesday night, last night gold fell another US$29.00 to US$1642.60/oz. It's a mathematical relationship inversely with a rising dollar, but no QE3 implies no further monetary inflation, against which gold is a hedge. And given no QE implies no more Fed bond purchases, US bonds are suddenly being dumped. Last night the US ten-year yield leapt 17 basis points to 2.27%. That's an enormous move in one session.
Then there's commodity prices. The stronger the US dollar, the weaker US dollar-denominated commodity prices, at least until pure demand-supply balance becomes more of an influence. Last night aluminium, copper, lead and zinc all posted 1-2% falls, while the dollar also put oil under pressure with Brent down US$1.16 to US$124.98/bbl and West Texas down US$1.03 to US$105.68/bbl.
While in simple terms a rising greenback should imply a stronger US economy, its impact on commodity prices acts as a dampener with regard to equity prices. The good news for us Australians is that a strong greenback also means a weaker Aussie, and last night it fell 0.7% to US$1.0450.
A retreat from US bonds means the interest rate differential between equivalent German, British and Japanese bonds is widening and that is the fundamental basis behind the US dollar's strength. The gap to the Aussie is closing as well but it is still very wide, particularly with the RBA holding fast at the moment. Hence while Australian economists can see a short-term pullback in the Aussie as global markets adjust to new realities, the growing belief is that the Aussie will simply remain stronger for longer based on that yield gap, Australia's AAA rating and attraction as an investment destination. ANZ this week joined Macquarie in forecasting an Aussie of US$1.10 in the medium term, albeit ANZ can see the recent US$1.03 low being tested in the interim.
With commodity prices falling overnight, the SPI Overnight is suggesting a response in the local market today with a fall of 19 points or 0.4%.
We have reached somewhat of an inflexion point, a “where to now?” level. The bulls are coming out of the woodwork on US business television but others do not believe we can stop worrying about Europe so soon. There will be US economic data to absorb tonight with the Philly and Empire State manufacturing indices, followed by industrial production on Friday.
One problem the Fed has at present is that traditionally it never makes any major policy changes in the lead-up to an election. Given fiscal policy can act against monetary policy, and an election can bring either a new government or new policies from the incumbent government, it makes sense for the central bank to sit tight until it knows the outcome. So while the Fed has reiterated its zero rate policy out to 2014, any return to thoughts of QE3 or any other major policy changes beyond rolling its current balance sheet are unlikely before November, barring any new major global catastrophe.
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