FYI | Aug 07 2007
By Greg Peel
Did Wall Street just seal the deal for an RBA interest rate rise tomorrow?
The morning session on Wall Street is seemingly losing its relevance as yet another strong relief rally did not kick off in earnest until after 2pm. The Dow closed up 287 points or 2.2% to post the biggest points rise since October 2002. The broader S&P 500 chimed in with 2.4% although the Nasdaq only managed 1.4%.
Goldilocks was grinning from ear to ear by four o’clock but experienced traders remained somewhat cynical. Risers only beat decliners by 6 to 5 across the S&P and most of the day’s volume was concentrated earlier in the day. Volume began to drop off quickly as the real rally set in, which is an unconvincing sign for those in the know. The bounce was led by the financial sector, which has also been by far the hardest hit. Non-financial blue chips remained largely static, suggesting 2.4% in the S&P had a lot to do with the big banks snapping back from temporary oversold signals.
Interestingly, Dennis Gartman had this to say in his newsletter written at the close of Friday on Wall Street:
“A bounce is over-due, and certainly we would expect one today or tomorrow. We’ll be interested to see how the volume responds as prices bounce, for we fear that volume will falter, suggesting all too strongly that the bounce is nothing more than that… a correction rather than the beginning of a new leg upward.”
The bounce-back in financials came despite an earlier fall in Bear Stearns which announced the sacrificial offering of its COO to the Gods. Warren Spector’s resignation initially spooked traders once more, but when Standard & Poors’ MD suggested the agency may have overreacted on its Bear Stearns mark-down and UBS came out with a recommendation upgrade for Merrill Lynch, the financial sector turned around and started running.
There were also rumours around that some of these existing LBO deals that were looking tenuous may indeed be completed and further rumours that sovereign money from the likes of China, Russia and the Middle East was in looking around for bargains. Rumours are the engine of a volatile market.
The Fed makes a rate decision tonight and that led to less excitable assumptions that some short-covering in financials was underway ahead of not so much a rate change (as no one expects one) but more a case of what the Fed will say about the credit crunch and the health of the economy.
The US dollar had another mixed night and is once again sitting on its all-time low index level of 80. Technical traders expect a significant break of this level to spell a major down move. Carry trading unwinding appeared to ease once more last night however, the Aussie fighting back to US$0.8584. But the big move overnight was in oil, which tipped over 4.5% to close down US$3.42 to US$72.06/bbl for September delivery.
The move in oil was seen as giving way to a build up of fears the US economy will indeed slow, and was exacerbated by the strong run up oil has witnessed in recent sessions.
Gold remained relatively steady in the face of the pushes and pulls of oil, the dollar, and a bounce-back in ten-year yields to 4.73%. The metal was down US$1.60 to US$671.10/oz. Base metal prices were once again mixed and volatile, with lead having another down day of nearly 6%. Once the market’s most boring metal, lead has certainly got them jumping a present.
After a 100 point down day on the local bourse yesterday, the SPI Overnight snapped back with a 102 point rally. Another day of fun and excitement ahead, particularly if you’re a Macquarie Bank staff shareholder in the worst escrow window in history.
The interest rate rise that most of the market thought the RBA would have to give us on Wednesday was potentially going to be scuppered if Wall Street went into freefall again last night, according to some observers. One presumes, therefore, that a hike is very much back on the agenda. If so, is the Wall Street bounce good or bad for Australian equities today?
