The Overnight Report: Oil Scuppers Rally Attempt

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By Greg Peel

The Dow rose 57 points or 0.5% while the S&P gained 0.3% and the Nasdaq 0.4%.

It’s official – Americans are incapable of saving. While the US government’s stimulus package was indeed specifically intended to to be a defibrillator on the heart of the economy, there were many who were of the reasonable view that in light of falling house prices, rising debt burdens and soaring oil and food prices a lot of the stimulus cheques would be used to pay down debt, supplement ongoing household budgets or simply go straight to the bank account. But they were wrong.

The cheques are being spent. May retail sales showed a jump of 1% – the biggest move in six months and twice what the market had expected. Even if you take out the obvious gasoline influence, sales still rose 0.8%. Furniture, appliances, garden supplies, clothing, leisure goods, general merchandise – all the necessities of life – saw big jumps in spending. Spending at restaurants and bars rose 0.8%. If we’re going to go down, we might as well go down in style.

The sales number sparked a big surge out of the blocks from Wall Street, which was already buoyed by the late announcement yesterday of the InBev-Bud takeover. By late morning the Dow was up 186 points, and the US dollar was also in a much more positive mood. The US dollar rally also sent the oil price down nearly US$5, so God was in His heaven and all was right with the world.

Until, that is, oil began to turn around. Despite the jump in the US dollar, buyers started to move back in to oil, still cognisant of Wednesday’s unexpected fall in crude inventories and the growing chorus of analysts calling oil to US$150. Crude rallied all the way back, and ultimately closed US36c higher at US$136.74/bbl.

The stock market gave it all back.

Not helping the deflated sentiment was news of a firing squad being called in at Lehman Bros. Whereas to date it has been the CEOs of several banking firms who have done the honourable thing, in Lehman’s case the CFO and COO were ritually sacrificed instead. Often the news of terminations in an ailing company sparks a rally in the share price, but Lehman fell another 4.4%. Early in the week Lehman placed US$4bn of capital at US$28. Last night the shares closed at US$22.70.

Toward the end of the trading session Microsoft confirmed it was no longer interested in making a play for all of Yahoo. Microsoft shares jumped 4% but Yahoo shares fell over 10% in what was generally a sour note for the tech sector. Yahoo could have sold to Microsoft for at least US$35. Last night the shares closed at US$23.52. Stand by for a shareholder revolt and subsequent court case.

In a last gasp effort, the Dow scraped back up to be 57 points higher on the close. But the mood on the day was only one of faded hopes.

In response to the rising US dollar, gold fell US$13.00 to US$867.70/oz. The Aussie took a big hit, falling US1.3c to US$0.9345, which incorporated weakness in the local session from the surprise fall in jobs.

Base metals were mostly weaker on the dollar rise, with zinc copping the brunt. Despite news of a fall in inventories, zinc fell 3% to its lowest level since December 2005. But the story was different for nickel. Nickel surged close to another 6% as BHP Billiton ((BHP)) announced the four-month shut-down of a smelter for upgrade purposes. Australian supply issues are the focus of a bouncing nickel price this week, as BHP’s news follows the earlier explosion-related production downgrade from Minara.

The SPI Overnight rose 36 points.

Don’t be spooked about Wall Street tonight, but it is Friday the 13th.

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