FYI | Oct 18 2007
By Greg Peel
For the record, the Dow closed down 20 points last night, or 0.15%, while the S&P rose 0.2% and the Nasdaq put on a comparatively whopping 1%.
The Dow opened slightly higher, before falling as much as 138 points by 2pm, and then rallying back. There were largely three factors driving Wall Street last night – oil, economic data and earnings.
The oil price traded through the US$89/bbl level at one stage last night, reacting to the news that the Turkish parliament had approved military incursions into northern Iraq for the purpose of putting down Kurdish rebel activity. This is one reason the Dow tumbled. But the Turkish story has been around for a week or so now and, along with domestic supply concerns, has largely been responsible for oil surging from US$80/bbl towards US$90/bbl. Hence last night ultimately became a classic “sell the fact” and oil dropped quickly from its highs to finish the session down US66c at US$86.95/bbl. The Dow recovered.
On the economic data front, the bad news was more bad news in housing. While no good news is expected for a while in housing, the bad news was actually worse than expected. New home construction fell 10.2% in September – about twice what was expected. The building permits figure was similar. This puts construction growth at its slowest pace in 14 years. The only positive from this is that the 10 month overhang of existing inventory is unlikely to grow.
More bad news came in the form of the Fed beige book, which was declared to be more “downbeat” about economic activity than hoped. The only good news is that the September CPI rose only 0.3%, and core 0.2%, suggesting inflation is still not an issue.
But when you add this all up, the conclusion is there is still nothing stopping the Fed from cutting rates again – which is the great big trampoline that sits under Wall Street. The US dollar fell on the data last night, and the ten-year bond, which has been relatively quiet lately, dropped sharply in yield from 4.65% to 4.55% as expectations of another rate cut grew.
Another rate cut potentially means the US dollar is history, but Tuesday night’s rally in the dollar occurred because both the EU and UK posted benign CPI increases as well. There has been a lot of speculation both would need to raise rates on inflation concerns, but now there isn’t. If European inflation had come out looking dangerous, the dollar would have been toast.
So the reaction to the lower US dollar was a slightly higher Aussie (US$0.8911), while gold went the other way on oil and reduced inflation concerns and fell US$5.20 to US$754.60/oz. What were base metals to do? Dollar down, oil down, gold down. Well the response in London was copper and tin down 1%, zinc down over 2% and lead down nearly 5%, but the Dow hadn’t bounced at that point.
Returning to the stock market, the third pervading factor last night was earnings. And you only have to look at the disparity in the major index moves to conclude that reports last night were mixed.
The Dow was hampered by a poor result from IBM in the previous after-market, offset by a good result from Intel, but last night brought a poor result from United Technologies. Meanwhile, a great result from Yahoo in the previous after-market helped the Nasdaq to surge, and after the bell this morning eBay announced a cracker. So the Nasdaq will probably look good again tonight, depending on how the Google result fairs.
JP Morgan also put out its third quarter result last night, and it wasn’t nearly as bad as Citigroup’s. In between all of this, the S&P seemed to split the difference. But also aiding the S&P were big moves in listed Chinese stocks, which took off on new rumours that plans are afoot to merge the Hong Kong H shares and Shanghai A shares, basically opening up more opportunity for Chinese and foreign investors alike.
The SPI Overnight rose 20 points, as the Australian market continues to find it difficult to see anything as negative. Strength in the US tech sector should provide a big boost for the Aussie tech sector today. Oh wait…what Aussie tech sector?
