Daily Market Reports | Mar 21 2008
By Greg Peel
The Dow rose 261 points or 2.2% on Thursday. The S&P gained 2.4% and the Nasdaq 2.2%. In sharp contrast to Wednesday’s session, the Dow made its solid advance despite another night of carnage for commodities. Commodity prices did manage to bounce slightly from severe lows by the close of trade, however.
Gold posted another 3.5% fall, losing US$33.40 to US$910.10/oz, having traded as low as US$902. There was no bounce for silver however, which closed on its lows at US$16.71/oz, down a remarkable US$1.66 or 9%.
The oil price was only slightly weaker, down US70c. However, as the April contract rolled into May on Thursday there was another US$3-odd to give up in backwardation. Hence oil closed at US$101.84/bbl for May delivery, having touched a low of US$98.90 earlier in the session.
Base metals were well and truly trashed in early trade. The LME official close, which occurs mid-session in London, showed aluminium down 3.5%, copper down 5%, lead down 6%, nickel down 4.5%, tin down 5% and zinc down 5%. There was some squaring up later in day, however, as traders headed into the four-day weekend. Thus the final movements as reflected in New York closing prices saw aluminium down 3%, copper 1.6%, lead 4.5%, nickel 2% and zinc 5%.
The movements in all commodity prices were exacerbated by the US dollar which continued its bounce. The dollar was higher at 99.40 yen but the big move was against the euro, which fell to US$1.5430. Last week the euro looked set to break US$1.60. The Aussie was thus slammed again, falling over US1c to US$0.8989.
So on Wednesday we had a big fall in commodity prices which sparked a 293 point fall in the Dow and on Thursday we had another big fall in commodities while the Dow rallied 261. What was the difference?
Well for starters, Wednesday brought the news that Merrills was going to have to sue a bond insurer who was refusing to hand over US$3bn. This took the wind out of the sails of the financial sector rally which began on Tuesday. But with another day to think about it, Wall Street is becoming a lot more confident that the financials may have now seen their bottom (and a horrible sight that was). But to top things off, the benevolent fund otherwise known as the US Federal Reserve expanded its rescue package even further on Thursday, announcing it would add commercial mortgage-backed securities and collateralised mortgage obligations to its list of swappable paper. What’s next? Subprime CDOs?
Thus the financial sector put on a big rally, which saw the financial index gain 7%. Goldmans added 8%, Lehman 15%, Morgan Stanley 14%, Merrill Lynch 13%, Citigroup 10% and JP Morgan 8%.
But while it was all rosy at the big end of town, reality is still hitting down the chain. Business loan and financial services specialist CIT group announced it was having to tap into US$7.3bn of unsecured credit lines, and its shares fell 32%. More cautious traders are also keeping their eyes on Europe, from where there has been nothing but deafening silence since the fall of Bear Stearns. This may be about to change as Credit Suisse announced after the market’s close on Thursday it would post its first quarterly loss in the investment bank’s history.
As well as optimism shining through in financials, the stock market rally on Thursday also reflected the yin and yang of commodities prices. While the commodity crunch is a disaster for the materials sector, the fact remains that cheaper commodity prices are good news for everyone else.
There was even some slightly better news on the economic front, as the Philadelphia index of activity rose to -17.4 in February from -24.0 in January. Nevertheless, the leading economic indicators index fell 0.3% in February – its fifth consecutive fall – and weekly jobless claims rose by 22,000, which was more than expected.
So it’s all a very mixed bag, and the movements in New York now reflect selling of the previous winners (materials, energy) to buy the previous losers (financials, consumer stocks).
As Australia’s market is much more heavily resource-weighted than the US market, the trade off between tumbling resource stock prices and bargain hunting in the banks, for example, is more pronounced. Hence we saw the SPI Overnight only manage an 11 point rise. There were extenuating circumstances – March rolled into June on Thursday and then everyone left for Easter, meaning only the hearty were left to play overnight futures.
We still have another session on Wall Street before Australia reopens after Easter, as the US has no Monday holiday. So stay tuned, and go easy on that chocolate.
