Daily Market Reports | Jun 17 2008
By Greg Peel
The Dow fell 38 points or 0.3% while the S&P was as good as unchanged and the Nasdaq shot up 0.8%.
Last night Tiger Woods took on veteran journeyman Rocco Mediate in an 18-hole play-off for the US Open. Still tied after the play-off, the tournament then went to sudden death before Woods finally prevailed. Why am I doing a sports report? Because this was one of the most exciting US Open finishes in history. As a result, volume on the NYSE was 25% lower than average.
It was subsequently a wild ride across all markets, the most dominant of which at present is oil. Before the stock markets opened, electronic trading in oil saw a new record high of US$139.89/bbl.
This may come as a surprise to those selling down oil stocks in Australia yesterday, based on the 200kbpd increase in Saudi oil production announced on the weekend. But as warned, it was the US dollar which dominated proceedings. Firstly, with no mention of intervention arising from the G8 meeting, despite anticipation, those traders setting themselves long ahead of the meeting were caught. Then to top things off, the European CPI came in at 3.7% – the highest level in 16 years.
The 3.7% level was reached with a 0.6% increase in May CPI, which blew away the April increase of 0.3% to 3.3%. ECB president Jean-Claude Trichet was already making hawkish warnings last month, and now the market is more convinced a European rate rise will be forthcoming in July. It is now one year since the ECB made any change to rates, when it increased by 25 basis points to 4% before the credit crunch hit. Despite threats from Ben Bernanke, the less significant US May CPI released last Friday suggested the Fed will likely remain on hold. If the ECB raises alone, there goes the US dollar.
And so it did. And so oil took off. Aiding oil’s rise was news that fire had broken out on a Norwegian North Sea oil rig, and its closure would mean the loss of 150kbpd production. So much for the Saudi’s 200k increase. Traders had decided that apart from the unreliability of any OPEC promises, 200k was merely a drop in the barrel anyway in the greater scheme of things. There is 450kbpd being lost in Nigeria due to rebel activity, and Nigeria produces the light, sweet crude which is most needed for gasoline production.
The International Energy Agency also announced that OPEC spare production capacity fell below 2mbpd in May for the first time since 2006. Of what is left, 1.45m is in Saudi Arabia.
But after oil hit a new record high, a funny thing happened. It turned around and went straight back down to hit a low of US$133.69, before ultimately settling at US$134.61/bbl – down US25c on the day session. Observers were unclear as to why the turnaround was so dramatic, but fingers were pointed at tonight’s expiry of oil futures options. Wild volatility around expiry dates is not unusual. Either that, or everyone left to watch Tiger.
The stock market followed a similarly wild path in opposition to oil, with the Dow being down as much as 95 points before bouncing back into the green, and finally settling down 37. The Nasdaq did its own thing as the merger game hots up in tech stocks.
Early weakness was also assisted by the New York (Empire) state manufacturing index for June, which fell to -8.7 from -3.7 in May.
A positive influence was provided by Lehman Bros, which officially released its second quarter result despite having made a preview release last week. It hadn’t changed. The CEO announced “Our capital and liquidity positions have never been stronger”, and for some reason everyone bought it. They also bought the shares, which were up over 5% on the day. This had a positive influence on all financial stocks.
There was no relief in the building sector however, as the National Association of Home Builders announced its industry sentiment index fell to 18 this month, equalling the lowest reading in the 22-year history of the survey. At its peak three years go, the index read 72.
With the drop in the US dollar, gold put on another surge of US$11.30 to reach US$882.10/oz. The Aussie snuck back up to US$0.9409.
Base metals wobbled around as usual, but were mostly stronger on the back of a weaker US dollar. Copper jumped over 1.5% and tin 4.5%. Nickel was the only downer, losing 1%.
The SPI Overnight lost 26 points.
Highlights to come this week include second quarter profit reports from Goldman Sachs tonight and Morgan Stanley on Thursday, and Friday is “quadruple witching” in the stock market, when stock futures, stock options, index futures and index options all expire simultaneously. Anything could happen this week, and probably will.
