Daily Market Reports | Mar 06 2008
By Greg Peel
Once upon a time, real commodities (as opposed to financial ephemera) used to trade quietly amongst wholesale suppliers and consumers, ticking up and down the odd cent each day. Only a handful of speculators played the market, patiently riding out bigger picture views. Today real commodities are no longer just “stuff”, but an asset class all of their own. They have become as much a form of financial ephemera as any stock index or bond spread. Fund trading has taken control of the floor, and the real suppliers/consumers are just periphery.
OPEC recognises this fact. There had been expectation that OPEC would announce an increase in production at its meeting last night, given the price of oil was at US$100/bbl. OPEC, one the other hand, has scoffed at the inflated oil price, suggesting it was a mirage and that real demand was actually falling. OPEC even threatened to cut production. Whatever they might have decided, it is well known that the individual members will pump out as much oil as they can anyway – no matter what the quota – but it is also suspected that collectively OPEC is already running at peak levels, and actually has little scope to raise production even if it wanted to.
Last night OPEC decided to leave its production level where it was. At the same time, it was announced US inventories had actually fallen this week after several weeks of continuous increase. Observers have been waiting for the oil price to collapse, given the US slowdown and those rising inventories which point directly to reduced demand. While weekly inventory numbers tend to be fleeting and volatile, the market – now dominated by commodity funds – was not going to argue the toss. Oil rose a full US$5.00 last night to close at US$104.52/bbl. This was the biggest one-day rise since oil futures were listed in 1983. By just about any measure (and there are several) it was a new all-time high in real terms, surpassing the 1980 peak.
Suffice to say, the bout of profit-taking which occurred in commodity markets on Tuesday night was rapidly reversed and it was back to Inflation Central, helped along by renewed weakness in the US dollar. Gold rallied US$24.70 to US$988.70/oz. Silver jumped a remarkable US$1.04, or more than 5%, to US$20.78/oz. Platinum was higher, palladium was higher. Wheat, corn, rice and soybeans were higher.
Base metals exploded back to the upside, having started the session lower. The London official closing prices (which are marked mid-session) showed steep falls, on a catch up from Tuesday’s late sell-off and early morning weakness. But the late session, which is best illustrated by the New York prices, saw a big turnaround. Copper, aluminium, zinc and nickel ultimately added around 3% each by the London close.
The Dow finished the day up 41 points, or 0.3%, having first been up 136 and then down 73. The S&P and Nasdaq both closed 0.5% higher.
The early strength in the Dow was a result of some not-quite-so-bad economic data. The Fed Beige Book – an anecdotal assessment of twelve separate economic regions – revealed two-thirds of the regions were experiencing a “weakening pace of business activity”, while the other third was experiencing “subdued, slow, or modest growth”. This was hardly a shock, but while indicative of weakness Wall Street seized on the fact that not one region was actually receding.
They also seized on the fact the ISM non-manufacturing index (about 85% of the wholesale economy) posted a 49.3 in February, bouncing back from the market-shattering January number of 44.6. It was a better than expected result, and a fillip for stock market gains. A 2.5% reduction in factory orders was overlooked, as was the ADP employment number which, when extrapolated, suggested only 2,000 jobs were added in February compared to the market’s expectation of 20,000.
The ADP number can end up being vastly different to the government’s number, which is released on Friday.
But the strength in the market was sapped at lunch time when monoline insurer Ambac announced a US$1.5bn issue of new capital. A consortium of banks has been working to save Ambac’s AAA rating, which basically means propping up capital. This was the best they could do? Where were the sovereign funds, the billionaire white nights, the heroes come to save the day? By throwing it out to the market – an offer of picking up diluted capital in a distressed company which is still teetering on the brink – the consortium dumfounded Wall Street and the financial sector was rapidly sold off.
However, it emerged in the fine detail that US$1bn of the issue was in ordinary shares, which have been fully underwritten by said banks and, supposedly, already subscribed. The other US$500m was in convertibles, and said banks have themselves bought another US$500m. Weighing it up, Wall Street decided it wasn’t quite as bad as it looked, and so the market recovered.
The US dollar fell to new lows against the euro, however, although it did post a bit of a rally against the yen. This allowed the Aussie to bounce, rising back a half cent to US$0.9325. The US bond market went back into inflation mode, as after another choppy day following the fortunes of the Dow the two-year closed unchanged at 1.65%, but the ten-year added 9bps to 3.70%. The curve continues to steepen.
The SPI Overnight added 57 points as it charged to a close. This is the second night in a row the SPI-O has moved in points terms more than the much higher-indexed Dow. Yesterday it was down 46 but the ASX 200 opened up about 75 before giving it all back. The Ausralian market is currently very volatile.
