FYI | Oct 13 2006
By Greg Peel
Has Wall Street overdone it? Clearly not yet. My headline of yesterday just goes to show that a day is a long time in the markets and that we live in uncertain times. However, it is apparent that the market is currently looking for any decent excuse to shoot for the stars.
On Wednesday Alcoa’s result disappointed, and Monsanto provided downbeat guidance. Minutes of the Fed meeting were surprisingly more hawkish than expected. The market teetered, and concerns were raised at the kick-off of the quarterly reporting season.
Obviously it just needed to warm up. Last night the Dow Jones rallied 95 points or 0.8% while the S&P500 was up close to 1% and the Nasdaq surged 1.6%.
It was a day for retailers. Costco surprised with its result and the stock ran 8%. PepsiCo posted a 71% jump in Q3 earnings and increased guidance, although having already run hard it finished lower. The response was different for McDonalds, however, which ran 3% when Q3 guidance was upgraded.
The tech sector was the overall best performer, as the Nasdaq move indicates. The fifth largest company in the S&P500 – Microsoft – posted strong gains and led the market higher.
While the Fed’s rhetoric may have been revealed as hawkish on Wednesday, the Fed’s “beige book” told a slightly different story, noting that despite a cooling in the housing market there were few signs of pricing pressures in the economy and that wages growth was relatively modest.
That was a red rag to a bull.
Yet the market clearly likes to cherry pick its good news, as last night it was revealed the US trade deficit widened 2.7% in August to US$69.9bn, surprising economists who were expecting a contraction to US$66.4bn. This news sent the US dollar lower and the gold price subsequently higher. Gold rose US$4.30 to US$578.80/oz.
The bad news is that the sentiment on gold is as low as it’s been for some time, with frustrated bulls becoming increasingly disenchanted. The good news is Indian exports are reportedly surging. This is something that has long been anticipated yet has failed to make any impact up to now. The question now is to whether gold can break back through US$600/oz, and then head toward US$700/oz (as GFMS is still predicting), or whether lack of positive sentiment will remain for a while yet.
Note: The US trade deficit issue is always a cloud hanging over the economy, unless you take the view of “outside the box” thinkers GaveKal. GaveKal suggests the trade deficit is misleading, as it is measured in price terms – not margin terms. While the flow of goods from China to the US may far outweigh the reverse, China makes virtually no margin while the US makes extraordinary margins on its capacity to outsource production. Says GaveKal: which economy would you prefer to back?