Daily Market Reports | Jul 31 2008
By Greg Peel
The Dow rose 186 points or 1.6% while the S&P matched with a 1.7% rise and the Nasdaq only managed 0.4%.
If I were a rugby league player, I’d say it was a game played in three halves last night.
After a strong day on Tuesday, the momentum continued early with the release of the ADP private employment number. Every month we get these private sector employment numbers from private researcher ADP, and every month they tend to bear little relationship to the official number released two days later. Sometimes they’re consistent, and some times they’re not, meaning correlation is negligible. Nevertheless, Wall Street always responds regardless.
Economists were expecting the ADP number to show a 50,000 drop in jobs for the month, but instead there was a 9,000 rise. So this is good news, and off we went. Stocks rallied, the US dollar rallied and, importantly, oil broke down through its technical support level at US$122/bbl and fell to US$121.20 – a fall of about US$1.
But then two things happened. Firstly, the weekly oil inventory data were expected to show a rise in gasoline supplies as demand destruction in the US continues to weigh. But gasoline supplies dropped. Then Israeli prime minister Ehud Olmert announced that he would resign in September. This really set the hawks amongst the doves. His likely successor is the transport minister who pushed oil up through US$140 a few weeks ago when he suggested Israel would attack Iran if necessary.
As a result, oil shot back up to close US$4.58 higher on the day at US$126.77/bbl. After falling solidly for two weeks, oil was always ready for a bit of a bounce on short-covering anyway, and here was the opportunity. The rise knocked the wind out of the sails on Wall Street, and lopped a good 100 points off the 150 point gain up to that point.
That ended the second half. We then entered the third.
Following from yesterday’s announcement from the SEC that the moratorium on naked short selling of 19 financial stocks would be extended beyond its initial week, the Fed announced last night that its emergency funding facility for investment banks, which was due to expire in September, would be extended into 2009. The Fed has not exactly been swamped by investment banks gasping for a hit since it opened this emergency window – for there is still a negative stigma attached – but as all US financial institutions start looking for capital to repair their broken balance sheets the Fed is clearly aware that an extension at least provides those institutions with a cuddle from Mum if they need one.
This announcement provided the fillip for an unsure financial sector, which is still trying to get its head around yesterday’s announcement from Merrill Lynch. Does Merrills’ sale of CDOs at 22 cents in the dollar mean a flood of similar write-downs must follow from other banks – ie bad – or does it mean a bottom has been found in CDOs and, even if more write-downs must follow, we can honestly say we can see a bottom in share price falls – ie good? Are we at the end of the beginning or the beginning of the end?
The coin came up heads, and the financial sector took off. But this time the energy sector had reason to take off as well. Thus resulted the unusual situation of the Dow rallying 186 points on a US$4 rise in oil. One could interpret this in one of two ways, or both: (1) the market is now happy that oil is trading around US$125 and not US$150, so a bit of blip no longer means panic stations; (2) the financial sector has once again been sold down too far, and there is a growing belief July 15’s rescue offer from the government for Fannie and Freddie, after spectacular financial sector falls, was the blood-on-the-streets bottom that was needed before the bull market can begin.
Beware the too-fast financial sector rally – we’ve seen them often enough now. This positive sentiment probably has some legs however, so further strength would not be a surprise so long as no one else blows up in the meantime. But if there is another rapid dip ahead – and there probably will be, for this story is not yet over by a long chalk – the next factor to note is whether a lower low is created, or a higher low is created. The latter would be a good sign.
On the positive employment news, and a jump in the US dollar, gold went on a slide last night. Comex traders also reported further weakness when respected gold (and everything else) trader Dennis Gartman announced he was abandoning his long gold positions. Gold fell through US$900/oz and was looking at 893 before the bounce in oil sparked a recovery. Nevertheless, gold ended down US$12.90 on the day to US$905.50/oz. It is also a rare day when oil rallies US$4, silver rallies US14c, and gold falls US$13.
The Aussie posted a big fall over 24 hours, down nearly a cent to US$0.9442. The weakness began locally with the lower than expected local building approval numbers, and continued as the US dollar was mostly stronger on the day.
The LME, which is confused as hell, decided higher oil was good. Copper rose 1.5% and nickel 2.5% but lead, which has had a decent run, fell 2%.
The SPI Overnight was up 40 points. Were the ASX 200 to go one better and rally 64 points today, guess where we’d be? Yep – right back at our friendly 5000 mark.
