FYI | Sep 20 2007
By Greg Peel
Tuesday’s 2.9% rally in the S&P 500 included a big surge in the Materials sector. Materials had been weighed down by concerns of a US recession but the Fed rate cut and subsequent US dollar fall was enough for the sector to assume higher base metals prices ahead. In Australia the Materials sector similarly posted a 4.4% gain yesterday.
The London Metals Exchange had closed for trading on Tuesday ahead of the afternoon Fed announcement. Only nickel posted a serious gain, independently driven by lower inventories. But for the LME it was time to respond the the Fed cut last night, and respond it did. Despite its previous 4% rally, nickel surged close to 10%. Zinc was up 6%, and aluminium, copper and lead all posted gains between 3 and 4%. Tin was the only laggard, with less than a 1% rise.
These catch-up moves were little tempered by a small recovery for the US dollar last night, which rose slightly against all major currencies. But as long as the dollar/yen is rallying, so too will the Aussie dollar – to US$0.8565 overnight. Gold slipped off its highs, down US$2.10 to US$721.30/oz. The smart money is suggesting the rapid rally straight through the US$700 mark will probably result in a profit-taking pullback to the resistance line, and some consolidation, before it’s US$850/oz here we come.
Oil kept doing its own thing however, up another US42c to $81.93/bbl – every post a record.
The Dow was up 128 points mid-session before settling back to close up 76 points, or 0.5%, for the day. The S&P put on 0.6% and the Nasdaq 0.5%. At 13,815, the Dow is now only 185 points or 1.3% shy of its July 19 all time high close. It is quite possible that in another session or two, Wall Street will have discounted the mortgage crisis, the repricing of risk, financial sector losses, the frozen asset-backed commercial paper market, and a slowing US economy, down to zero.
The close of 6356 on the ASX 200 yesterday is only 66 points, or 1.0%, below the July 24 high close of 6422.
The first news of the day on Wall Street came from Number Two US investment bank Morgan Stanley, which posted a 17% fall in third quarter earnings compared to 12.5% consensus. This was in contrast to Tuesday’s Lehman Bros report of a lesser than expected loss. Whereas once upon a time this news may have sent financials crashing, we are now in a new world of Fed protection. Morgan Stanley’s shares finished lower but the financial sector was mixed overall. Bear Sterns shares fell while shares in Goldman Sachs rose. Both investment banks report tonight.
The Fed reaffirmed on Tuesday it would be closely monitoring inflation, so last night’s August CPI release would have been of interest. Headline inflation actually fell 0.1% – the first fall since October 2006. Core inflation (ex food & energy) rose by 0.2%.
The surprising fall in the headline came about as result of an even more seemingly curious 3.2% drop in energy prices, which in turn was driven by a 4.9% drop in gasoline prices. Low gasoline prices and US$82 oil? This only goes to highlight the downstream lag between the pump and crude. The question now is: will crude fall to meet gasoline or will gasoline rise to meet crude? Apart from the fact summer is now over in the US and the next step is to turn the heaters on, crude is as much of a supply story as a demand story. Last night President Bush told CNBC’s Larry Kudlow that “all options are on the table” with regard to Iran, which thus includes military action and/or oil export blocks. Bush declared that the markets will just have to fit in with US foreign policy.
Which would have to suggest the gasoline price will begin to shoot up in September/November to meet the crude price. Food prices rose a less surprising 0.4% in August however, and are now running at 5.6% annualised compared to 2.1% for 2006. Overall headline inflation is running at 3.7% annualised, compared to 2.5% in 2006.
The Fed, however, supposedly concentrates only on core inflation, which following the August result is running at 2.3% annualised, down from 2.6% in 2006. Core inflation is used because food and energy prices tend to be volatile. Well they’re not very volatile at the moment. They’re only going up.
In other economic news, new home construction fell 2.6% in August, which is hardly knock me down with a feather stuff. It was the slowest pace of construction since June 1995 and construction is now 19.1% below a year ago.
The SPI Overnight was up 21 points.
