Daily Market Reports | May 28 2008
By Greg Peel
We can thank the Germans.
The Germans are worried about uncertain financial markets and what’s going on in the US economy and subsequently a monthly consumer sentiment measure took a dip, suggesting worries about the European economy have become more pronounced than they were earlier in the year. On the back of the weak number, forex traders sold down the euro to below US$1.57.
Euro selling implies US dollar buying, and as the markets opened in New York to a stronger dollar it was a signal that it’s time to take some profits in oil. As the oil price began to fall the equation fed on itself, with US forex traders buying dollars on the strength of oil’s pullback. By the close oil hit US$128.85/bbl – down US$3.34 since Friday and down over US$4 from yesterday’s electronic trade.
The fall in the oil price provided the impetus for the Dow to rally 68 points, or 0.5%. The S&P rose 0.7% and the Nasdaq, which has proven a lot more sensitive to the oil price, rose 1.5%. (Technology companies want us all to spend money on gizmos which we may not do if we can’t afford to fill the tank).
It was not all plain sailing however, and Wall Street stumbled mid-morning on the release of some mixed economic data.
For starters, it was also the day on which the official US consumer confidence figure was released. The index fell to 57.2 from 62.8 in April when economists had pencilled in 60.0.
While this number threatened to offset the effects of a similar German result the next round of data was more heartening. Sales of new homes actually rose 3.3% in April, marking the first up-month since October. Huzzah!
Wall Street reacted positively to the news and the US dollar and stocks began heading northward again. However, wise heads were quick to dismiss the seasonally adjusted figure as a statistical blip that should not be seen as marking a bottoming in the housing market. April may have risen 3.3%, but only after March fell 11%. In the 12 months to April, US new home sales have fallen by 45%. We are not out of the woods yet, by any stretch of the imagination.
And the Case-Shiller house price index for March was released, showing that the average national house price fell 14.4% from the first quarter 07 to the first quarter 08.
Nevertheless Wall Street posted a reasonable, if not convincing, rally. Those stocks which have been particularly trashed of late – such as airlines, transports and tech – saw some bargain hunting. Two broking houses coincidently issued ratings downgrades on all three of the investment banks Lehman, Goldmans and Morgan Stanley, but with financial names having been heavily sold down last week there were more buyers trying to capitalise on oversold prices than sellers looking for further downside. Financial stocks rallied.
The stronger US dollar and weaker oil price were enough to trip up gold’s recent rally. Gold fell back US$23.40 to US$904.70/oz. If oil’s fall was the beginning of a more significant pullback, we might see gold heading back well below US$900 once more, at least until oil stabilises. A shake-out is needed in oil, but almost everyone agrees the price at which oil will resettle will still be a daunting number. US$125 is a popular choice.
What was the base metal market to do? The dollar was higher which should mean lower metal prices, but oil was lower which should mean a not-as-weak US economy, and that’s positive. Metals continue to be stuck in a conundrum range. Nevertheless, the sentiment was to the weak side in a quiet post-holiday session. Aluminium dropped 3% while nickel, which was heavily sold down last week, fell another 3% as well. Zinc fell 1% but lead, which was also sold heavily last week, bounced back by 1%. Copper barely moved.
The SPI Overnight was up 29 points. We should see a bit more confidence in the local market today. It really wanted to rally yesterday but was a bit timid given no leads. However, uncertainty at the moment suggests there may be some lower levels ahead in the short term. If the oil price really does pull back sharply then Wall Street will love it, but the 50% resource-laden ASX 200 probably won’t.
