FYI | Oct 12 2006
By Greg Peel
The recent new highs in the Dow Jones Industrial Average has been a fillip to US sentiment and, aided by lower bond yields, helped to keep investors interested in the US dollar despite most economist calls to the contrary. Regardless some dubious assertions that the Bush administration is in there buying stock ahead of the mid-term election, has the recent euphoria been misplaced?
The third quarter reporting season kicked off on Wall Street last night with the much anticipated profit report from Alcoa. The aluminium giant and Dow component revealed a massive 86% profit increase for the quarter year-on-year, but the analysts were expecting more. Chemical behemoth Monsanto did manage to match expectations but provided downbeat FY07 guidance with regards to ongoing earnings growth.
The Alcoa “surprise” didn’t surprise everyone, given the low level of aluminium prices in the LME during the quarter, but clearly the market had been just a bit excited.
Despite a lack of ratification as the whether OPEC will or won’t cut production levels to support oil prices crude fell nearly 2% again last night to be US$57.45/bbl on Nymex, suggesting perhaps a US$50 level isn’t so impossible after all. This had the obvious effect on energy companies, where doubts returned as to whether the sector could keep generating record profits.
Many economists have begun to tout that the next move in interest rates is more likely to be down than up, given falling oil prices and subsequent abatement in inflation concerns, and a slowing US economy, but the release of the Fed minutes from the last meeting poured cold water on that theory.
Although the Fed believed that "real GDP growth would continue to slow into the second half of 2006," offering further evidence that it will remain on hold, it added "before strengthening gradually thereafter". The minutes also noted that members "continued to see a substantial risk that inflation would not decline as anticipated."
Falling bond yields have been a significant driver of the equity market, but the Fed noted it was still “quite concerned” about inflation (a concern shared by RBA governor Glenn Stevens – more on that later today). Bond markets had begun to price in an easing, but that view will likely need to be rethought.
The market was spooked late in the day when reports came in of a plane hitting a building in New York, which just goes to show the market may be relatively unfazed by North Korean nuclear tests, but it is still trigger-happy on the real and present danger of further terrorist attacks. A quick turnaround ensued, however, when terrorism was dismissed as a cause. The Dow closed down 15 points.
The gold market remained in limbo overnight – not falling with the oil price, but not doing anything else exciting either. Whether or not the threat of more North Korean tests is holding it up is unclear, but without any solid directional indicators on the US dollar or the US economy at the moment traders appear unwilling to take much of a bet either way.
Base metal prices surged across the board last night which lends weight to recent views from analysts that metals markets are set to hit new highs again soon. Given the markets rose against a backdrop of a falling oil price, it seems the oil/metal lock-step may have now broken as commodity index investment influences give way to pure demand/supply fundamentals.
The mixed results across the board for the Dow, oil and gold last night appear to have outweighed sentiment for the local market with regards to metal prices. The SPI overnight is up but a point.