Daily Market Reports | Apr 10 2008
By Greg Peel
You’d think with all the accelerating talk of a US recession, of a recession that might be deeper and longer than previously expected, of a flow-on effect into Europe, Japan, and ultimately China, that global demand for oil would be falling.
Nup.
At least not according to the US government’s weekly inventory figures for West Texas Intermediate – forever until probably now the benchmark for global crude demand. Everyone expected those inventories to rise on falling demand but instead they fell and the market was confounded. The balance was an effect from falling imports, suggesting global oil production is being directed elsewhere. As the US prepares for the summer driving season, talk is of US$4/gal gasoline.
Mind you, many commentators scoff at these weekly numbers, which often belie logic and can put yo-yos to shame. Nevertheless, last night’s numbers were enough to send crude to a new record intra-day high of US$112.21 before settling at US$110.87/bbl, up US$2.37 from the previous close.
At the same time oil was hitting its highs, Wall Street was coming to terms with a pre-market announcement that United Parcel Service had reduced its first quarter profit expectations, and saw a gloomy outlook as the recession and higher oil prices take effect. Not a great day for oil to trade to a new record. UPS – America’s biggest freight company – is considered an accurate barometer of domestic economic activity. 75% of UPS’ income is derived within the US.
UPS shares only fell 3% on the news, but its gloomy outlook set retailers off and then the rising oil price set off transports and then retailers some more. As an example of the market’s sentiment at present, Bed, Bath & Beyond, which one presumes hails from Manchester, beat the Street with its earnings after the bell but added downbeat second quarter guidance. Its shares were then trashed in the aftermarket.
The three indices told the tale last night. The Dow, which has a big weighting from oil giants Exxon and Chevron, fell 49 points or 0.4%. The S&P, representative of the broad market, fell 0.8%. The Nasdaq, loaded with tech stocks, fell 1.1%. It seems the attitude to tech has changed in 2008 compared to 2007. Whereas previously they were considered defensive (50% of income from outside the US), now they’re considered a recession risk (50% of income from within the US).
There was more bad news in the financial sector, if that is at all possible. As the commercial and investment banks have been selling what they can to boost capital, the proportion on balance sheets of what they can’t sell – the so-called “Level 3” assets such as CDOs – has risen. The implication is thus that there will be yet more write-downs. Everyone has been waiting for a “kitchen sink” ending to the write-downs, but in reality this is a myth. While the US housing market continues to slide asset values must also continue to slide, prompting “chaser” write-downs. To stop the write-downs, the housing market must plateau.
Investment bank shares were thus sold again last night. Lehman fell 7%. Citigroup, on the other hand, saw a rise as it announced the sale of $12bn worth of leveraged loans to an as yet unnamed party (possibly private equity). This is good news for Citi’s balance sheet, but it also represents US$12bn of positions Citi will never recover any profit from. It is bailing out at the bottom. The expectation is growing that all banks will be forced to cut their dividends.
When you add that all up, a 49 point fall in the Dow is not too bad. Indeed the low point was 108 points down. But what we are seeing is a classic bear market drift following the “bear trap” rally on the first day of April. April Fool’s day no less. (A big cheerio to everyone at Ruse Capital). Bad news is largely expected, and investors are priming for the cycle-leading rally which will take the market out of the depths of despair. But as recession talk intensifies, the bottom line is share prices = earnings forecasts, and those are looking gloomy.
It didn’t help matters that the US dollar had a weak night last night. Traders bought into the euro in anticipation of no rate cut from the ECB tonight accompanied by more hawkish rhetoric. The dollar was sold against all major currencies however, with the UPS news not helping. The yen was thus bought, which means weakness for the Aussie. It slipped a third of a cent to US$0.9280 in the latest round of the custody battle.
Gold followed the lead of a weaker US dollar and stronger oil price to add $19.20 to US$934.50/oz, spurred on by the overnight release of the annual GFMS report which called gold at US$1,100/oz this year. (More on that today).
But arguably the most anticipated market at present is base metals. On a falling dollar and rising oil, it soon became apparent the Chinese, who had been strangely absent this month, were caught short. The result was copper surged 2.5% to break through to US$4.0123/lb, just shy of the all-time high. Aluminium – a metal for which 2% is considered a substantial move in recent times – jumped over 4%. The others added 1-2%.
Grain prices, which have also been undergoing a pullback of late, charged ahead once more. Corn, beans and oats were all up 4-6%.
The SPI Overnight fell 22 points. The ASX 200 closed yesterday at 5520, so we may be back to test support at our significant 5500 level once again today.
