Daily Market Reports | Jul 24 2008
By Greg Peel
The Dow rose 29 points or 0.3% while the S&P added 0.4% and the Nasdaq 1%.
The day’s activity might be described as “volatile within a tight range”, given the Dow opened lower, shot up 96, fell back to square, bounced around square, and then ticked up 29 at about a quarter to four. In terms of the moves we’ve seen this week and last, it was a subdued performance, suggesting the euphoric buying (or was that scrambling short-covering?) has eased. For the circumstances were similar.
Dolly, who was never meant to go away, did. Oil thus fell another US$4, spurred on by higher than expected increases in last week’s US gasoline, diesel and heating oil supplies. The Saudis were right you see – there was never such a sudden increase in demand for crude, beyond the trend, to support US$150 oil, there was only a shortfall in oil products. This was driven locally in the US by reduced refinery capacity, which has now reversed, and on a global scale by a certain sporting host panic-buying diesel stockpiles lest the lights go out on a certain opening ceremony.
The oil futures contract rolled over into September delivery last night, which means yesterday’s August close of US$127.95 has to first be adjusted up to US$128.42 on the contango before the US$3.98 overnight fall landed us at US$124.44/bbl. Remember how we so panicked when oil went through US$125 on the upside? Now it seems like oil is cheap again. Watch out for US$110 – that’s where the real break-out occurred. Then, later down the track, prepare for a return to double figures.
The oil price fall did little to spark another significant Wall Street rally this time. There were also announcements of better than expected results from three Dow components – staple (if you’re American) food retailer McDonalds, telco giant AT&T, and pharma giant Pfizer. The latter two kicked 3-4% on the day but Mickey D’s actually closed down.
Then there was Washington Mutual, which put out a shocker of a result in the after-market on Tuesday but saw its shares jump 6%. The WaMu result was very similar to the Wachovia result earlier in the day – dreadful, but not forcing the need for new capital. Wachovia jumped 27% in the day session, but sanity prevailed this time and last night WaMu shares fell 20%. Nevertheless, the financial sector was mostly stronger once more, with the terrible twins leading the charge with further 11% rises. By the time you read this, the US Congress is expected to have passed the Fannie & Freddie bill, which permits the government to effectively nationalise half of all US mortgages if it has to.
The Congressional Budget Office has pencilled in a US$25bn rescue cost for F/F, but one US senator has suggested Treasury secretary Paulson “hasn’t told us the truth about this bill” and that a rescue package would cost more like US$1 trillion. That would have the printing presses smoking, for the US government does not have US$1 trillion. Mind you, it doesn’t have US$25bn either.
Which should have gold bugs licking their lips, but unfortunately it’s just not the hour for gold at present. As oil keeps falling it drags up the US dollar, which put in a rather mighty run last night. Gold caved in and fell US$25.70/oz to US$919.00/oz. At the height of financial sector panic last week, gold was looking at US$1000 again. As oil reverts to trend it looks like sub-US$900 may be on the cards.
The Aussie lost almost a cent to be US$0.9627.
A strong currency needs to be supported by a strong economy, and clearly greenback buyers are assuming the fall in the price of oil (to levels we thought were overwhelmingly expensive in May) will save the US economy. It mattered little that last night the Fed released its monthly Beige Book – a survey of national economic conditions – and concluded “the pace of economic activity has slowed somewhat since mid-June”. Eight out of twelve Fed districts reported a weakening in local economies. All twelve said prices for everything were “elevated or increasing”. In other words, two-thirds of the US is in stagflation.
The Beige Book was at least one reason why the buyers were a bit quieter last night.
Over in London, base metal markets were very choppy. Traders are currently trying to work through the balance of falling oil and a rising US dollar, and, in some cases, falling inventories. Hence last night aluminium and copper were slightly weaker and nickel dropped 3%, while zinc rose 3% and lead 4%.
The SPI Overnight was up 12 points.
We have passed over the US earnings season hump and now the reports begin to thin. Last night’s after-market highlight was Amazon, which initially blew the Street away with a doubling of earnings in the quarter. Its shares jumped 9%. However, closer inspection showed that not only did the numbers include the one-off sale of a German DVD outlet, they were also much bolstered by the low US dollar. It was a mirage, and the shares fell back to be down 2% at last glance.
