Daily Market Reports | Jun 11 2008
By Greg Peel
The Dow gained a mere 9 points while the S&P fell 0.2% and the battered Nasdaq lost another 0.4%. This time the Dow got a kick from Coca-Cola, which rose 4% following an analyst upgrade. However in contrast to Monday, the Dow’s closing momentum was to the downside, wiping out an earlier 80 point jump.
Again the focus was on oil, and the current high level of volatility persists. Prior to the open on Nymex news of more rebel activity in Nigeria sent oil back up to nearly US$138 in electronic trade. The situation was not helped by secretary general of OPEC once again trundling out the line that the oil price is being driven only by speculators and not by fundamentals and thus there is no justification for OPEC to increase production. He also reiterated that it had “comfortable” spare capacity.
The secretary general sounds more and more like a banker every day, trying to convince nervous shareholders that he has plenty of capital. The next step for such a bank is usually to raise an absurd amount of capital, but in OPEC’s case that would mean suddenly finding a new oil field. There are many convinced that the only reason OPEC doesn’t raise production is because it actually has no spare capacity at all.
It was then the International Energy Agency’s turn to weigh in on the argument, and it had good news. In light of the reduction in oil price subsidies in various Asian countries recently, the IEA has reduced its global demand assumption for 2008. But this news was tempered by an additional IEA revelation that oil production in the OECD has slumped rather dramatically, leaving tight supplies at present in contrast to the usual pre-summer build.
Tomorrow sees the weekly US inventory data, and the predictions are for the numbers to bear out the falling production evidence such that crude supplies should see a drop. However, with increased capacity at refineries in operation inventories of diesel, heating oil etc are expected to build, which should put downward pressure on prices.
Nevertheless, in the end it was the Fed who finally managed to send the oil price lower.
“The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing from growth as well as inflation,” said Ben Bernanke, in a speech made late on Monday evening. This sent the US dollar shooting up once more, as again the notion is reinforced that despite a weak US economy, the next move in rates is more likely to be up. Having hit US$1.58 on Friday, the euro is now back below US$1.55 after two-days of rallying, fuelled by interventionist talk from the Treasury and inflation-fighting talk from the Fed.
The end result was that oil fell US$3.04 to US$131.31/bbl in the close-to-close move, although throw in electronic trading and the move was actually closer to a US$7 fall from the high.
The fall in the oil price once again provided some relief for stocks, but this simply wasn’t sustained. Tech stocks continue to see profit-taking. Financial stocks did see some relief, with the commercial banks such as Citi and JP Morgan putting in 2-3% rallies, but the investment banks failed to rally much and Lehman Bros lost yet another 7%. Lehman’s slope is looking slippier by the day.
The economic data of the day, the April trade balance, showed a 1.2% widening in the deficit over the month based mostly on higher energy costs. Imports thus outweighed exports (which is not good news for the US dollar but the currency was doing its own thing), although if you adjust for inflation the deficit actually contracted by 0.1%.
Having had its geopolitical tension spike on Friday, gold gave in to interventionist talk and inflation warnings by falling another US$25.00 to US$866.20/oz. High inflation should be bullish for gold, but not if the US props up its currency (in the short term). The Aussie fell another US0.4c to US$0.9462.
Base metals mostly drifted lower once more on the stronger dollar, with the exception of nickel. Nickel has been trashed of late, but when Australia’s second biggest nickel producer – Minara Resources ((MRE)) – came out yesterday and said production would be cut by 23% due to the WA natural gas explosion, it caused nickel to jump 4% on the LME.
The local market was weak yesterday, putting together two days net of US weakness and an 8% fall in the Shanghai index. The latter was brought about by yet another announced rise in the Chinese bank reserve requirement, which will see an additional 1% by June 21. This takes the Chinese reserve requirement to 17.5%, and is intended to tighten up credit to fight against China’s runaway inflation, which is now over 8%.
The SPI Overnight fell another 13 points, and we are now in the no-man’s land between 5500 above and 5300 below. Without any unforeseen shocks, it looks like the latter may be tested again before the former.
