Daily Market Reports | Apr 17 2008
By Greg Peel
The Dow rose 256 points or 2% last night. The S&P was up 2.3% and the Nasdaq 2.8%. Volume did not see any huge increase on recent sessions.
Following disappointing earnings reports earlier in the week from the likes of Wachovia and General Electric, last night saw earnings reports that either surprised to the upside or at least weren’t worse than expected. The lead-in was provided by Dow component Intel which had jumped 6% in Tuesday’s aftermarket following strong first quarter earnings and which held that move in the daylight session.
More impetus was provided early by two more Dow components – consumer staple Coca-Cola and commercial/investment bank and Bear Stearns swallower JP Morgan Chase. Coke’s results were strong, driven particularly by overseas earnings. Coke has taken its fizzy brown sugar concentrate to new far-flung frontiers as undeveloped economies emerge into the spotlight. Let’s hope China’s dental schools are seeing strong enrolments. But as Coke is a consumer staple in the US a good result was not a huge surprise, and the shares were only mildly positive.
But the really good news was that JP Morgan saw its profits collapse by 50% in the first quarter! And it wrote down another US$2.6bn! Euphoric traders piled in and pushed JPM’s shares up 7%, dragging the rest of the commercial and investment banking stocks up 3-4% along with it.
The point is that these numbers were smack on expectation. There were no further skeletons trucked out into the daylight, and the CEO suggested the bank was well capitalised and had enough liquidity to help it through these difficult times. After the disappointment of Wachovia, JPM was a ray of sunshine. It also showed that traders are itching for an excuse to buy into this market, at least until another GE comes out of the woodwork.
Those were the highlights on the earnings side, and then there were the economic data. Last night the Fed released its monthly Beige Book – an anecdotal assessment of economic conditions across twelve regions.
It found that consumer spending had fallen away to nothing, labour market conditions are deteriorating and manufacturing activity is going nowhere. Once upon a time this sort of assessment might have sent Wall Street scurrying south, but now it’s largely factored in. The March industrial production figure did belie the Fed’s findings however, rising 0.3% when a 0.1% fall was expected.
Also extracting a glazed-over expression from the market last night was news that March new home construction fell to its lowest level in 17 years, and is now down nearly 12% annualised. The housing slump is the root of all the problems on Wall Street, so while an expected 50% loss from a bank might be exciting news in the short term, long term there is definitely no light at the end of the housing tunnel.
But perhaps the most surprising data release last night was the March CPI. Yesterday’s PPI – which was on expectation at 0.2% core but shocked with a 1.1% headline rise – did not bode well for the consumer number. How much of this price surge was passed on? Before Wall Street was to find out, it had the release of the equivalent European data to contend with.
The ECB has refused to lower its cash rate at all from the beginning of the credit crunch, citing inflation concerns. Those concerns were ratified last night as the March CPI in Europe came in with a full 1.0% increase at the headline, taking annual inflation to 3.6% – the highest level since European data were first amalgamated in 1997. There is no way the ECB will cut its cash rate. Now it was up to the US.
Following a suspicious inflation result of 0% in February, the US march CPI came in at 0.2% at the core (matching the PPI) and only 0.3% at the headline (way below the PPI). The numbers met consensus. It seems that while the rest of the world is suffering from soaring prices, the US has remained relatively immune. The biggest offset to food and energy increases was a collapse in clothing prices, which does make sense if US clothing retailers have found themselves overstocked in a recession. But with the annualised rate standing at 1.8%, and a weak US dollar pushing up the price of imports, one wonders just where the price relief is really coming from.
(For those interested, an alternative measure of US inflation is calculated by shadowstats.com at above 7%.)
The benign inflation number added further fuel to the fire of stock market enthusiasm, as once again the way is clear for the Fed to cut rates down to 1% as everyone is expecting. But it also sent the US dollar into a tailspin once more against the euro. The euro climbed to a new record of US$1.595, and is now sitting just under that line in the sand of US$1.60. Is that the point at which the G7 steps in?
The dollar did manage to rally against the yen, but only for the reason that a positive stock market means a healthier risk appetite, which in turn means carry trading. Where does the yen selling go? Straight into Aussie buying. The little battler leapt a full US1.36c in 24 hours to US$0.9395 – once again pushing up towards recent highs.
And what else does a tanking greenback mean? Another surge in commodity prices. Gold jumped US$15.90 to US$944.70/oz. But elsewhere, a combination of a weak dollar and fundamentals was at work.
For the second week in a row, US oil inventory levels shocked by falling when a rise was expected. Data suggest demand has fallen as well. Where is this oil going? (The conspiracy theory is the Bush Administration is topping up the Strategic Stockpile in readiness for an assault on Iran). Oil leapt into blue sky at over US$115 last night, before settling at a new record close of US$114.93/bbl – up US$1.14.
On the base metal front, some news came in that a lot of people have been expecting. Chilean copper mine sub-contractors have downed tools (Chile is the world’s biggest copper producer). It has been quiet on the strike front lately, so traders have been waiting in anticipation. As commodity prices soar, workers are expecting their cut of the spoils.
Copper jumped by as much as 4.5% in late London trading last night, taking it above the US$8800/t mark, before settling back to be up over 2%. The New York price once again breached the US$4.00/lb mark, with settlement at just a bee’s appendage above. It was another strong day for aluminium, which jumped over 2%, while recent laggard nickel saw a rebound to be up over 3%.
Unsurprisingly, the SPI Overnight was up a solid 150 points. There is not much not to like in the overnight lead up – strong US financials, gold up, oil up, metals up. We shall leap right over the wall at 5500 on the ASX 200 today and set sights, once again, for that elusive 5700. The 5700 level – top of the well established trading range – has been reminiscent of one of those dreams where you run down a corridor but the door at the end just seems to get further away.
And excitement is also building on Wall Street from a technical aspect. The Dow is back to only 35 points below the April Fools rally peak, while the S&P is back at 1364. The S&P reached 1370 on April Fools, but most important is the big figure at 1400. That’s now only 2.6% away, and was last seen on January 14. A break of that level would have the technicians wetting themselves, and a solid kick-on rally is expected.
And maybe tonight is a good chance. Dow component and tech leader IBM beat the Street quite handsomely with its aftermarket announcement of first quarter earnings. Second quarter guidance was also raised, and the stock traded 6% higher. Barring any other shocks, it could be game on again tonight.
