FYI | Jul 03 2007
By Greg Peel
Thin trading volumes ahead of the Wednesday holiday assisted the Dow’s 127 point rally overnight. The Nasdaq and S&P 500 were similarly strong. But the big news was the June ISM manufacturing index – a survey of purchasing managers – which came in at its highest level since early last year in registering 56 points. This implies business is strong, and was accompanied by the “prices paid” figure which implied inflation is not particularly evident.
This inflation news correlated with Friday night’s PCE deflator which was also relatively low, all up suggesting the US economy is is moderately good health despite housing woes and core inflation is under control. Adding to bullishness was another round of M&A rumours.
Unlike last week’s volatile sessions, last night saw a steady rally over the day. The economic data took some heat off bond yields, which fell a shade below 5% for the first time in a couple of weeks. The bond market has not recently received any new news with regard to the sub-prime mortgage crisis, which investors are taking as a good sign. Others warn that such a crisis takes a while to really filter through. Bear Stearns has announced it will take at least two weeks to calculate the losses in its failed hedge funds.
While core inflation fears may be waning, headline inflation is still under threat as oil continued its upward push, trading as high as US$72/bbl for August delivery before settling at US$71.09/bbl. A flood in one small US refinery was the catalyst for the panic, which normally would not be so influential but takes on greater significance in a market fearful of current geopolitical rumblings, including London’s terrorist concerns.
While the US dollar may have been boosted by a stronger economy, the signs are that any interest rate rise is a long way off. This, coupled with positive economic data out of Japan which signalled a likely interest rate rise from the BOJ, sparked a strong sell-off in the greenback, falling 0.6% against the yen, to a critical level of 1.3624 euro, and falling to a 26-year low against the pound.
The fall in the US dollar affected a strong surge in the Aussie dollar, which finished the session at US$85.86.
The US dollar fall also allowed precious metals to post their first decent rally for a while, with gold rising US$9.10 to US$656.60/oz, and silver US$0.28 to US$12.58/oz. Base metals were once again mixed with copper rising 1.5% in New York, zinc 2.5% and lead 4%, while embattled nickel fell another 4% to US$15.62/lb – a far cry from the US$24/lb level of earlier in the year.
The SPI Overnight posted a 55 point gain, pointing to a strong opening on the local bourse in trading conditions that are also slightly thinner due to school holidays.
