FYI | Jun 28 2007
By Greg Peel
Was it all just a bad dream?
With the Australian market having been beaten down 124 points to close on its lows yesterday, local investors would have been heartened to wake to the news that the Dow finally managed to rally 90 points last night after two failed attempts this week. What’s more, the rally was indeed one of 167 points from the morning’s initial low.
Is the sub-prime scare thus over?
No. There was no new news on the sub-prime front last night other than that the SEC has commenced “informal” investigations of Bear Stearn’s hedge funds and many other hedge funds involved in CDO trading as well. So far this is largely a matter of course. Itching for a reason to buy, Wall Street likely took no news as good news.
There was no joy earlier on when it was learnt durable goods orders fell 2.8% in May following three consecutive months of gains. This sent the Dow down as far as 77 points before the buyers stepped in. A positive mood returned when Wall Street was returned to its normal programming, that is there were a couple of public takeover bids and one private equity bid (US$1.9bn for The Guitar Center. Keith Richards perhaps?). There were also a handful of healthy earnings announcements.
The second quarter earnings reporting season starts in earnest next month, once the US has taken its July 4 weekend break. July 4 falls on a Wednesday, which suggests that next week on Wall Street will be very quiet indeed. Monday and Tuesday will be seeing squaring up and Thursday and Friday will probably be ghost towns. Indeed, there was a suggestion last night that the ultimate rally was also somewhat of a squaring exercise ahead of the Fed rate announcement tonight and the interrupted week ahead. Whether or not it was just bears talking their book, the rally was said to be less than convincing.
Crude oil shot back up US$1.20 last night to US$68.97/bbl for August delivery. The reason given was that now US inventories are expected to be lower. One of the reasons given for an equivalent fall in oil yesterday, apart from the end of a strike in Nigeria, was that inventories were expected to be higher. Me is beginning to thinks that all this inventory talk, which I noted yesterday seems to jump back and forwards with abandon, is really just the old adage of “more buyers than sellers” (or vice versa). In other words, whoever the wire services are asking for an opinion on oil price movements doesn’t really know, so “inventories” is always a fallback.
Nevertheless, gold managed to pull back from the brink and posted a US$3 rally to US$643.00/oz, aided by oil and perhaps a tiny slip in bond yields. It had also been hit hard yesterday, as was silver. Silver managed a US7c rally, but that was little comfort after a US60c fall. All base metals rallied last night after the carnage of yesterday, but not with any conviction.
The SPI Overnight rose 49 points.
A note on uranium:
The Nymex uranium future has rolled over to the July contract, with June settling at US$136/lb. There is one, and one only, contract open in July. This contract remains at US$140/oz and has done for some time, indicating no movement in the bid/offer spread for weeks. In other words, the contract is a failure, or is a very slow starter.
Over 90% of new futures contracts fail. It is not such a surprise that this one has failed to ignite, given uranium is a very tight market and most uranium deals are conducted between producers and utilities on long term price contracts. The futures market was only ever going to be one for the speculators, more so than the hedgers. Hedge funds (who are the speculators, not the hedgers) supposedly control around 20% of the spot uranium supply, but then they are likely all long. This could have interesting ramifications for the uranium price. Our esteemed editor has addressed that very subject in his weekly analysis published today and I suggest it is required reading for this course.
Coming back to the futures, there are 45 December contracts open which have settled at US$143.50/oz, and 20 Januaries at US$152.00/oz. While such a contango can easily be explained by a general consensus that the uranium market will only get tighter in the short term, given the positions were established a while back it would be dangerous to assume these prices are a confirmation that the uranium price definitely must go higher from here.
