FYI | May 25 2007
By Greg Peel
It’s not a hard and fast rule, but it it’s a reasonable bet that whichever way the US market is trending, it will square up in the opposite direction ahead of a long weekend. Traders want to enjoy a three-day break and chillax (as your teenager would say) without having to spend the time fretting about open longs or shorts. On that basis, the couple of days before Memorial Day this year were always a chance for a bit of profit taking.
But wait!
Before the opening bell, it was announced that April durable goods orders were up 0.6% – the third straight monthly rise. What’s more, the March rise was revised to a solid 5%. Core capital equipment also rose 1.2%, and this has always proven a good barometer of economic health. There’s nothing wrong with this economy at all!
After the opening bell, it was announced that April new home sales had surged a staggering 16% – the largest increase in 14 years. Huzzah! The great US housing decline is over! To top things off, supply of existing homes for sale had fallen from 8 month’s supply to 6.5 months, due to the lowest real prices since 1970.
Let’s buy!
And buy they did, pushing the Dow up 99 points into further blue sky. Then the traders did that dangerous thing traders like to do when the market’s buoyant - they went to lunch. Over tasty meals of deep-fried fat and near-beer, it began to dawn. What these economic data really mean is that the Fed’s warnings about inflation are looking ominously prescient. We could be looking at an interest rate rise. Omigod!
Get me out!
And out they got, sending the Dow down by that same 99 points and I’ll raise you another 84, to finish down 0.6%. The rush was on to take profits and still be able to enjoy the holiday. The S&P 500 faired worse, falling 1%, and the Nasdaq worse still, falling 1.5%.
But there was little doubt what this news meant to the US dollar, which has been recently enjoying a healthy bounce from it’s lows against the euro and the yen. A stronger economy and the possibility of a rate hike are both dollar positive. This was not good news for gold of course, which fell US$6.80 to US$653.80/oz and is once again sitting on a precipice.
ETF selling, central bank selling, a stronger US dollar and, overnight, a fall in the increasingly volatile price of crude oil have all conspired to put gold in this precarious position. The good news is that it seems like it’s trying to hold US$650/oz. The bad news is that it might not.
Continuing strength in the US dollar was never going to be helpful for base metals either, which now appear to be possibly in solid correction mode. The correction remains largely technical, as little has changed in the general supply/demand dynamic. With so many more investors playing metals in this day and age, technical volatility is to be expected in what was already a volatile game anyway. Last night’s scorecard in New York was aluminium down 1.3%, copper 3.5%, lead 3.7%, nickel 1.6% and zinc 2.5%.
A question to readers: Why might it help to compare the New York base metal closing prices with those in London on the same night?