FYI | Sep 13 2006
By Greg Peel
The International Energy Agency added grease to the current slippery slope of the oil price overnight when it downgraded global demand expectations amidst increased inventories and evidence that higher prices are finally creating the sort of demand destruction that higher prices should.
WTI crude for October delivery closed down nearly US$2.00 to trade under US$64/bbl for the first time since March.
It’s as if we’ve run the full gamut of an extended economic cycle in the space of six months. Upward spiralling oil prices were driving fears that inflation could not be controlled and that an economic slowdown was beginning. While the Fed paused its monetary tightening, it continued to warn of inflation, and Wall Street was not quite sure where to turn. Any hint of another rise sent stocks plummeting once more.
But suddenly it all seems like a distant memory. Fed chairman Bernanke may well end up being lauded in financial circles when earlier fears were held of his hawkish demeanour. The point about inflation is that it will have its own effect on the economy without a central bank needing to interfere to make things worse. Bullish commentators continued to chant that inflation would subside of its own accord.
And that is now the more general sentiment. The retreat in the oil price from its peak in August has meant inflation fears have all but evaporated. All in the space of less than a month. Similarly commodity prices have retreated from lofty heights, adding to the belief that inflation has suddenly been reined in.
The US may be a significant commodity nation but its sector weightings are such that resources and energy do not have quite as much of a weighting in the index as in Australia. Last night Wall Street began to see a light at the end of the tunnel, and realised consumer spending may not collapse quite as much as was earlier feared.
Consumer Discretionary was back!
Led off by an upside surprise result from Goldman Sachs Group, accompanied by an announced buyback of 15% of its ordinary stock, traders shook off news of a bombing attempt in Syria and attacked the consumer sector that until last night had been most unloved.
An auction of 10-year treasury notes proved well bid, forcing bond yields lower down the curve. This was another good sign as it relieves part of the debt burden on those profligate American consumers.
The Dow Jones closed up 101 points to 11,498, a rise of nearly 1%. Technology stocks also took heart from the change of mood and the Nasdaq rallied 2%.
Base metal prices also halted their perilous collapses last night. Nickel even bounced back 5%. Gold, however, failed to break back through the US$600/oz ceiling and it appears it will struggle to do so until at least September 24 when European central bank selling can definitely be called over. A break down through support at US$580 could see further retreats, but sentiment is for a bit of time marking in an otherwise volatile market.