Daily Market Reports | Apr 03 2008
By Greg Peel
Seasoned traders will tell you that the usual response to a very big up-day is a bit of a weaker market on the following day. There will be some profit-taking, and a bit of a pullback in the elastic band that was stretched a bit too far. However, the signal to look for is the market’s sentiment on the following day. A good Third Day will be indicative of follow-through. A weak Third Day means the rally is more likely to fail to some degree, and so far the rallies in 2008 have done just that. A flat day just means everyone’s exhausted and wishing the weekend would come. It’s all part of the consolidation process.
Last night the Dow closed down 45 points or 0.4%. The S&P’s fall was less at 0.2%, and the Nasdaq closed relatively unchanged. A pretty good result all up, but volume was low and conviction as yet indeterminable. The good news is that prior to Tuesday’s rally any rally in 2008 had been on low-ish volume while subsequent sell-downs saw turnover pick up. This is classic bear market stuff. But Tuesday’s rally was on solid volume and last night saw muted volume on the sell-side. Seasoned traders see this as a positive sign, but are not counting their chickens just yet.
The Dow traded only in a 141 point range last night – narrow by credit crunch standards – but there were still a few ups and downs.
Before the market opened the ADP job report for February was released. This is the unofficial number which always precedes the official number, which is due on Friday. The two rarely correlate and the market prefers to believe the official number, despite the fact it always gets revised twice. Some believe the ADP number is more reliable but it doesn’t matter much as everyone reacts to the official number. Extrapolating last night’s ADP number provides jobs growth of 33,000 in February, whereas economists are expecting the official number will show a 60,000 fall. The latter seems to have more credibility in the current environment, but you might as well have your coin ready.
The real point of interest last night was the testimony to Congress by Fed chairman Ben Bernanke – a regular part of his job, but the first such testimony post Bear Stearns. The big news was that Bernanke suggested there was a possibility the US economy could fall into recession in the first half of 2008. This sparked a round of selling.
It didn’t last long though because – let’s face it – Bernanke is simply three months behind everyone else. He also emphasised the technical definition of recession (two consecutive months of negative growth) which was a bit pedantic and anodyne from a man of Bernanke’s capacity. It suggests the triumvirate of Bush, Paulson and Bernanke have agreed to “spin” the situation as much as possible lest their own pessimism become part of the recession process. Fair enough, and the market largely shrugged anyway. It also shrugged when Bernanke suggested that the “rescue” of Bear Stearns – something poor Ben had to deal with given only 24 hours notice, as he pointed out – was necessary to prevent the complete collapse of global financial markets. We all knew that as well.
The real entertainment will be tonight, when Bernanke is joined for Day Two of his testimony by the head of the New York Fed (the central bank branch that actually dishes out the money and which is now holding about US$30bn of Bear Stearns “investment grade” paper) and the CEOs of Bear and JP Morgan. There are a lot of conspiracy theories flying around about sweetheart deals and so forth, and the Democrat majority Congress should have a field day. As they say on commercial television before every single show, “This one should not be missed”.
(My favourite conspiracy theory is the one where the Fed let Bear collapse and then buried it for US$2 because Bear was the only investment bank which refused to pitch in to the rescue fund for LTCM in 1998.)
With all the talk of is this or isn’t this the bottom post Bear Stearns, it has to be remembered that we have begun to enter the first quarter reporting season on Wall Street, and at the end of the day actual earnings are what drive markets. There have been some big ups and downs already, and last night Blackberry maker Research in Motion announced a Street-beating result just after the bell. Its shares are up 5% as we speak in the aftermarket and that might help a positive tone in tonight’s session. But there have also been some shockers.
The “other” market of interest to everyone is, of course, commodities – the fate of which has a lot to do with the US dollar. After a big dollar bounce on Tuesday the greenback slid once again last night on Bernanke’s recession comments. There’s always a yin and yang of course, and yang is currently provided by the bond market, which is now beginning to forecast only one more rate cut of 25bps to 2.00% before the Fed calls halt and starts thinking about saving the dollar and fighting inflation. In other words – hiking. But the financial markets would have to exhibit some serious stability before that happens, so it will be some time off yet. However, look out commodity prices when it does happen.
The dollar was weaker against the euro and pound last night but not against the yen. It would seem yen selling has returned as carry traders become more confident post Bear Stearns. The poor old Aussie dollar must be feeling like a child whose divorced parents are fighting over custody. It rallied back three quarters of a cent last night to US$0.9149 on yen selling, having fallen half a cent the night before on general US dollar strength. Looks like range trading is the current prognosis, which is at least a good result for Aussie exporters.
If the Aussie is a child of divorce, oil is currently the Black Knight. Oil dipped below US$100 last night on higher than expected inventory numbers but then rapidly shot back up on dollar weakness, adding US$3.85 to US$104.83/bbl. Oil has tried to breach US$100 several times now, but each time it yells “Only a flesh wound!” and comes fighting back. It has been trapped in a US$100-105 range for some time.
And all was forgiven in precious metal last night as a falling dollar meant a return to normal programming. Gold rallied back US$23.10 to US$904.80/oz and silver US57c to US$17.31/oz.
All commodities staged another fight-back rally last night, allowing commodity stocks to offset what would have been a larger index fall driven by profit-taking in financials. Base metals were mixed in London however, as that market deals with its own yin and yang of US dollar vs recession.
The SPI Overnight was up 21 points despite Dow weakness, suggesting futures traders are happy to back a breach of the 5500 level on the ASX 200 (the ASX 200 future is actually at 5584 for June). This level, which was a cement floor on the way down, is now a cement ceiling on the way up. Yesterday the market finished with a headache from banging against it.
