Daily Market Reports | May 29 2008
By Greg Peel
The Dow closed up 45 points or 0.4%. The S&P added 0.4% and the Nasdaq 0.2%.
There was a lot of rocking and rolling going on last night, although not in the sort of range we’d become accustomed to during the height of the credit crunch. The Dow was up then down, deciding late in the session to run a bit higher again.
As stocks were opening the oil price was again weaker, being down around US$3 to US$126, but it was soon to turn around once more. The first piece of news for the day was the April durable goods orders number.
Durable goods orders fell 0.5% in April when a fall of 1.5% was expected. Economists prefer to strip out the volatile transport component (and car sales have plummeted) and that left an actual gain of 2.5% – the sharpest increase in nine months. Inside the number was an extraordinary jump in electrical equipment and appliances of 27.8% – the highest ever move for the category. No one seemed to question this.
So Wall Street was happy and forex traders were happy as well. The Dow and the US dollar both rallied. But then oil deviated from the script and began rallying as well. The turnaround in oil could be put down to a number of factors. Firstly, the durable goods number implies the US economy is not in as bad shape as perhaps thought, secondly, there was more rebel activity in Nigeria (but this is pretty de rigeur now) and thirdly, there is anticipation of a reduction in inventories when the weekly figures are released tomorrow.
Morgan Stanley analysts reportedly issued a report suggestion Brent (crude oil from the North Sea in Europe) could possibly reach US$150 per barrel.
Whatever the cause, oil closed up US$2.18 to US$131.03/bbl, which was about a US$5 turnaround and just goes to show how keen the buyers remain despite a couple of prior days of weakness.
The stock market stumbled once more as oil rose, and then more bad news hit the financial sector.
Firstly, shares in beleaguered insurance giant and Dow component AIG fell close to 5% as a Citigroup report suggested the US$20bn in rescue capital the company has raised may not be enough. And speaking of rescues, shares in Bear Stearns (yes- it is still twitching) fell below the US$10 offer price as a Wall Street Journal story noted regulators are examining how certain trading partners cut exposures ahead of the collapse.
But the big news in financials came via Cleveland-based regional bank KeyCorp, which raised its expectation for bad loan charges in 2008 to 1.0-1.3% of loans from 0.65-0.9% made recently in its quarterly report. That’s basically a 50% increase. Apart from the severity of the increase, what shocked (and angered) investors was the timing of such a material downgrade so soon after reporting. Shares in KeyCorp fell 10%.
Every regional bank was then hit accordingly, and even the big commercial banks copped it once more. Wachovia, for example, fell 4.5% to post a new ten-year low. With oil the recent focus of attention, and evidence supposedly suggesting financial market pressures have eased, it has probably escaped the attention of many that a lot of financial stocks are now trading below their Bear-rescue lows.
But at the end of the day the supposedly healthy durable goods number was not forgotten, and investors decided to push the Dow up in one of those rapid late rallies.
Gold fell as much as US$20 in the session last night – to US$890 – as the dollar rallied on durable goods and oil fell to US$126. However, the turnaround in oil also saved the yellow metal, which finished the day down only US$3.70 to US$901.00/oz.
The Aussie dollar had been rather smoothly tracking back and forward against the US dollar movement the last few days, but last night the trend was broken as the Aussie rallied back to US$0.9628 despite the strength in the greenback. Over the 24-hours, the Aussie was influenced by ANZ’s “two more interest rate hikes” report and yen selling.
Base metals were weaker, however, this time ignoring the higher oil price and strong durable goods orders. Apart from dollar strength, inventory reports last night noted rises for most metals, sending copper down 1.5%, zinc 2%, and nickel yet another 4%. These numbers were still an improvement on intra-day levels posted before oil turned around. There is some suspicion on the LME however that industry buyers have been placing what metal they have in LME stocks in order to force a lower buying price.
The SPI Overnight was up 42 points.
Well the SPI seems pretty keen, although it was up 29 points yesterday and the ASX 200 fell 66 points. That fall ignored the Dow and concentrated on lower oil, gold and metal prices, although even the financial sector, which appeared to be the early recipient of funds flowing out of materials, finished lower on the day. All up the mood seemed rather dour.
So it will be interesting to see what happens today. If we assume now that any Dow move under triple digits has become fairly irrelevant, then we clearly have to look to resources as those stock now make up 50% of the index. So for today we have oil up and gold and metals down. If we put in a decent rally today as the SPI is suggesting, one could only conclude that one element, and one element alone, is driving the market at the moment, and that is oil. But while a high oil price is currently seen as good for Australia (because it’s good for BHP), the opposite is true in the US.
