FYI | Nov 07 2007
By Greg Peel
Had your Berocca? Good.
The Dow closed up 117 points or 0.9% last night while the S&P added 1.2% and the Nasdaq 1.1%. It was a rare day on Wall Street as all three of the tech, energy and financial sectors posted gains together.
It was also a day of steadier trading, as the Dow slipped a bit off the blocks but then climbed steadily through the session to finally kick at the close. No to-ing and fro-ing this time. While the big tech names continued their upward trend it was a recovery in financial stocks that was most notable, with many of the battered names putting on 2-3% for possibly no other reason than there was no new bad news last night. Citi, however, fell again. The bottom pickers are out and about.
Another highlight of the day was a disturbed Ambac management arranging a head-to-head conference with the Morgan Stanley analyst who last week downgraded the stock to Sell and suggested the large mortgage insurer would have to raise capital in a difficult market in order to maintain AAA. They looked the squirming analyst in the eye and told him he was wrong, and the market pushed the stock up 15%. Ambac shares have been down 75% since May.
But the real story on the bourse last night was not about esoteric financial earnings, but about real “stuff”. Oil, precious metals and to some extent base metals boomed over night. The falling US dollar is behind a lot of the gains, and that in itself has become an interesting story.
The US dollar has been sliding mercilessly since the credit crunch began, accelerating an already downward trend. The dollar index is sitting precariously at its historical low of 76, while last night the euro pushed over US$1.45 once more. The only two up-days in the dollar recently have been when the Fed indicated it would probably not cut again, and on Monday morning when the weekend Citigroup write-down news sparked a flight to quality into US Treasuries and the dollar picked up as a result.
But last night’s session showed that the world is still factoring in further Fed rate cuts, particularly given the step-up in bad financial sector news that has emerged post the last Fed meeting. This, of course, is good news for the stock market, and goes some way to explaining why financial stocks picked up last night. Financial stocks have fallen so far that many a trader is looking for that elusive bottom – how much more bad news can come out? – and a rate cut can only be a positive. Except for the US dollar of course, which then begs the question: will the Fed cut if the dollar is heading into oblivion?
Either way, the dollar’s fall assisted in turning oil around from its down-day on Monday. Oil rose US$2.72 or nearly 3% to US$96.70/bbl, and most now suggest it will have to go to US$100 just to get that mark out of the way. But it wasn’t just the dollar.
The US Energy Administration Department has suggested that inventories will be down yet again this week and that the market has failed to take into account the supply disruption caused by recent storms in Mexico. It has also noted that whatever spin might come out of OPEC, the cartel is running at full production capacity. As we head into the northern hemisphere winter, demand levels are only going to rise.
And to top things off, a bunch of extremists blew up a pipeline in Yemen overnight, thus further disrupting supply. That’s all we need – another Middle Eastern flashpoint. The release of Turkish prisoners has now become irrelevant.
And as the crude price increases, so too is the gasoline price rapidly catching up. Gasoline has pushed straight back through the US$3.00/gal mark, and one wonders just how long the US consumer can appear to be resilient.
Add this all up – rising oil price (inflationary), continuing credit market woes, possible further rate cuts, collapsing US dollar – and you’d have to think it was positive for gold. Well it is. Gold jumped a full US$18.90 or 2.3% last night to a 28-year high of US$824.60/oz. It seems like only yesterday gold broke through US$700. And if that wasn’t spectacular enough, little brother was the real shiner. Silver leapt an astonishing 5.6% or US82c to US$15.48/oz.
The base metals were not quite as spectacular, but positive nevertheless, bearing in mind that London missed most of the Dow rally. The whole spectrum rose between 1-2%.
The SPI Overnight added 62 points.
The Aussie dollar continued its upswing, moving back to US$0.9282 ahead of today’s RBA interest rate announcement. About 99.99% of the market is expecting a hike, which would make things interesting if there isn’t one.
