Daily Market Reports | Jun 06 2008
By Greg Peel
“It is not excluded that, after having carefully examined the situation, that we could decide to move our rates a small amount in our next meeting in order to secure the solid anchoring of inflation expectations,” said ECB president Jean-Claude Trichet last night, as he left the European cash rate unchanged at 4%. “I don’t say it’s certain. I say it’s possible.”
With that the US dollar fell heavily against the euro, sending the latter back up to US$1.56. The sharp fall follows a week of tentative strength in the greenback, cemented by the unusual measure of the Fed speaking out on dollar policy. While Trichet’s hawkishness has been well understood for months and months, the rate hike threat nevertheless came as a surprise given markets have been expecting the European economy to weaken, thus lending weight to a relatively stronger dollar. As the US dollar has strengthened, so has the oil price fallen.
As soon as the news hit, the oil price began to rally on the weaker dollar, and suddenly the market was caught short and scrambling. When the dust settled, oil had risen by US$5.49 to US$127.79/bbl – the biggest one-day dollar jump in history.
This should have been bad for the stock market in general, as outside of the material and energy sectors a higher oil price is an excessive burden on the consumer. But it would seem the US consumer is alive and well.
Despite the American propensity to spend and then spend some more, many analysts had assumed consumers would use their government hand-outs – their “stimulus cheques” – to pay down debt or simply cover the rising cost of fuel. Not so. Wall Street expectations for the May same-store sales figure for America’s biggest discount store Wal-Mart were for an increase of 1.6%. A more optimistic Wal-Mart itself assumed 2.0%. But the figure came out at 3.9%, and all hell broke loose.
The Dow component shot up 3.7% for the day, driving an index rally of 214 points, or 1.7% to 12,604. The S&P jumped nearly 2%, settling above the important 1400 resistance line at 1404. The Nasdaq added another 1.9% as well.
The Wal-Mart number only served to add to pre-market bullishness, sparked by the weekly jobless claims number. With concern about tonight’s official monthly jobs figures overhanging Wall Street, the weekly claims fell 18,000 to 357,000 – the lowest level since mid-April.
Recession? What recession?
It was a mad scramble on Wall Street – not on particularly strong volume – as shorts were reversed. But there was a threat it might all come crashing down soon after lunch. Following yesterday’s warning from Moody’s that it might downgrade the ratings of bond insurers Ambac and MBIA, rival agency Standard & Poors just came out and did it. Ambac and MBIA no longer have a AAA rating with S&P.
This downgrade has significant implications for a vast array of credit instruments which will also lose their AAA ratings and thus no longer be able to be held in many large funds. But the share prices of both insurers had only a brief crash, before suddenly they turned around and rallied, closing up 6-7% on the day. In the general state of bullishness, no doubt contrarians were looking ahead to more government rescue (the NY state insurer has been working on this for months already). Both stocks had become the US equivalent of penny-dreadfuls anyway.
In other news a Fed report confirmed that Lehman Bros indeed has not “been to the window” lately, and in fact loans to investment banks by the Fed fell last month. That sent Lehman rallying back up 8% to live another day. Heavily sold financials were all hastily covered.
And that, as Paul McDermott would say, is the good news. Now for some reality.
Despite the surprising fall in weekly jobless claims (and this is a very volatile number) the monthly average of claims actually rose to its highest level in four months.
On the same-store front, the other major discount retailer Costco also posted better than expected same-store figures, but once you move out of staples and into discretionary it is a different story all together. Department store sales have fallen heavily. JC Penney, for example, saw a 4.4% fall for the month. Clothing sales have been shattered. Gap, for example, saw a fall of 8%.
Those cynical of the positive response suggest that (a) sales are not generally showing signs of improvement, they are just shifting down the quality chain to the discount retailers and (b) what happens once everyone’s spent their stimulus cheques?
The Fed’s domestic “flow of funds” report for the first quarter showed US net household wealth fell 2.9% in the first quarter, following a similar fall in the fourth quarter 07. The last time wealth fell in two consecutive quarters was in the recession of 2002. The Mortgage Bankers Association reported that 1% of home loans fell into foreclosure in the first quarter, and that the delinquency rate jumped to 6.35% from 5.87% in the fourth quarter. These two figures are the highest since 1979.
The number of prime adjustable rate mortgages proceeding to foreclosure jumped from 0.54% from 0.41%. The number of subprimes jumped from 5.29% to 6.35%. The number of homeowners with negative or no equity in their homes rose to 16% by the end of March, and that figure is predicted to rise to 25% by the end of June.
But that’s okay, because obviously everything looks rosy otherwise.
A funny thing happened in gold – it actually fell US$2.10 to US$876.90/oz despite the weaker US dollar and soaring oil. One explanation is that all of the dollar’s move was against the euro, while the greenback still rose against the yen. Similarly, the Aussie barely moved to US$0.9585.
It was only a weaker US dollar that saved base metals from another session of weakness, with the traditionally slow summer period ahead now weighing on sentiment. In the end prices were little moved except for lead, which fell another 4%.
The SPI Overnight jumped 71 points. It looks like 5500 in the ASX 200 has held fast once more, but one might question the integrity of movements last night. Such a blip is not uncommon, and we’ve seen a few in 2008.
