FYI | Feb 01 2007
By Greg Peel
The Dow eased at the last hurdle just shy of a new record last night. Not a bad effort for what has been a fairly uninspiring reporting season.
Of course, M&A has been a significant driver of the market of late, but last night’s 98 point jump, to 12,622, was all about the economy. No one expected the Fed to shift rates from their now five month mark of 5.25%, but everyone was waiting with baited breath for the Fed’s report card on the economy.
And it was good. At least, good enough. The key to the market’s response to Fed rhetoric is to look at the subtleties of the language. Briefing.com notes the housing slowdown is no longer qualified by “substantial”. “Stabilisation” was used. Core inflation was seen to have “improved modestly”, and the word “elevated” had gone.
In the real numbers, fourth quarter GDP was up by 3.5%, much better than the 2.0% of the third quarter. Recession? What recession? This was the fillip to drive the market higher, although it does have the caveat that a hoped for rate easing is now unlikely anytime soon. But the economy is no longer seen to be slowing, it’s seen to be growing, contrary to all warnings from last year.
While one would assume a stronger economy means a stronger US dollar, the diminishing of chance of a rate hike actually means the US dollar was weaker. As such, gold finally managed to breach the US$650/oz ceiling which has proved staunch resistance for some time. It didn’t, however, burst through on a rocket ship, as some were expecting, simply ending the day at US$652.50/oz.
Gold’s rally would have also been supported by further strength in the oil price. Nymex WTI rose another 1.7% last night to US$57.95/bbl – the biggest two-day move since 2004.
What can you say about oil? It was rather extraordinary that a warm start to winter should bring the mean reversion bats out of their caves, when it was as clear as day following night that the eventual cold snap would be a doozy. However, the weather has little effect when put up against OPEC production decisions, and as we’ve seen in the last week, OPEC can swing from one side to the other on a whim. It’s all rubbish anyway, as no OPEC member has ever stuck to the production quotas they have set.
Base metals were back in black in New York last night, with notably copper up 1.4%, nickel 2.8% and zinc 2.3%*.
With the SPI overnight up 42 points, indications are for another record day on the local bourse. I don’t want to get too decisive, as I’ve called it like Stevie Wonder these past two days. The trend (M&A aside) seems to be that every time there’s a bad night in metals, the market runs to yield, particularly banks. When metals turn around again, its back into BHP and Rio. Either way, the trend is solidly up, with just too much money needing to go somewhere, and not being withdrawn from shares in any meaningful way.
*Footnote: FNArena is often asked why we focus on New York metal prices and not London. The short answer is: New York trades later, thus the 4pm (8am EST) prices are the most up to date. Critics suggest the local market focuses more on London prices, and this is backed by the national broadcaster noting London prices on the news most nights. Well here’s a case in point:
When I published “Overnight Metal Carnage” on Tuesday, it was following big price falls in the 24 hour period in New York. The next night, big falls were marked in London. While London has the reputation, it remains that New York prices are later. London came into line. New York moves on that night however were modest as the damage had been done the night before. It’s a case of who leads who.