The Overnight Report: A Green Light For The Greenback

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By Greg Peel

The Dow rose 302 points or 2.7% while the S&P jumped 2.4% and the Nasdaq 2.5%.

One might call it the delayed reaction to beat all delayed reactions. On Thursday night the European Central Bank left its cash rate on hold at 4.25%. Last month the ECB had raised the cash rate from 4.00% – the first monetary policy of any change since the credit crunch began. The ECB’s only brief is to keep inflation on the leash – it has no brief to support European economic growth. As oil and other commodity prices surged, the ECB could no longer hold back in July, and despite howls of protest from Europe’s sinking export industry the bank moved to curb inflation.

The commodity rally has since ended in dramatic fashion. The ECB did not raise its cash rate again this week, and moreover suggested that the rate would not be raised again in the foreseeable future. The European economy has begun to collapse, just as the Japanese economy is collapsing, the British economy is collapsing, and the Australian economy is collapsing. China is next.

This is the final stage of the tropical storm caused when a subprime butterfly flapped its wings one year ago. There was a popular school of thought six months ago that the US economy was ring-fenced and that the economies of the rest of the world had decoupled from the world’s largest economy – an economy three times larger than that of Japan and four times that of Germany and China. However the fallout from the credit crunch has become everywhere a global phenomenon, and that’s what played out in the US on Friday.

Thursday had seen a raft of Dow component stocks – AIG, Wal-Mart, Citigroup, Amex – all hit with individual releases of bad news. It had also seen a slight bounce in the price of oil, triggered by concerns over the Turkish pipeline shutdown. The Dow fell over 200 points. But all of this was forgotten on Friday night. The world came to realise that while the US economy had been the first hit by the credit crunch, the tidal wave had now reached the shores of every economy on the globe.

Hence they sold the euro like there was no tomorrow on Friday – the currency posted its biggest one-day fall in eight years to hit the US$1.50 mark. Only a couple of weeks ago was it toying with US$1.60. The yen, pound and Swiss franc also crashed, and the Aussie  – well, remember US$0.98 not so very long ago? The Aussie has fallen almost two cents in 24 hours, printing, as I look at the ticker now, a perfect US$0.8888. There has to be an omen there somewhere.

What this means is that the US dollar broke out of its trading range along the trough of its credit crunch collapse last night, and soared. Americans will tell you proudly it’s all about a return to a strong dollar. That’s crap of course – the rest of the world has weakened. But that’s how exchange rates work.

Turkish pipeline or no Turkish pipeline, the oil price crashed again last night. It fell US$4.82, straight through technical support at US$117, finishing at US$115.20/bbl. Technical traders note the next support level is down at US$110, and then it’s on to US$100. You could say oil fell on the strong dollar, or you could say realistically that the collapse of world currencies reflects global economic weakness, and that translates into lower oil demand.

The Aussie may have hit 8888 on 080808, but Grant Hackett’s boys and girls would not be pleased to know the value of the bag of gold medals they’re about to enjoy are worth US$17.00 less after Friday, with gold finishing at US$855.50/oz. The US dollar has plenty of scope to maintain its recovery from here, as the world quickly adjusts back to economic equilibrium. The jewellery buyers are sitting at US$800.

It was carnage on the LME. It was noted on Thursday that the base metal complex was beginning to reach cost-of-production pricing, which implied there should be a floor. But there is no floor when stop-losses are automatically triggered on the wealth of commodity fund speculative positions. When late trading moved onto the “kerb” in London (an antiquated expression referring to the after-market), tin was trading 9.5% lower. Lead had fallen 7%, nickel 4% and zinc 3%. And the big boys – copper and aluminium, had fallen 3.3% and 2.3% respectively.

And the Dow rallied 300 points. It was all one-way traffic, driven on by a strong US dollar and weak oil in particular, and weak commodity prices in general. If inflation can be tamed, the US consumer can return to buying mode, or so the story goes. Even the energy sector posted gains, but it was all too much for the materials sector.

The financial sector put on 3.5%. Fannie Mae came out with a quarterly loss three times greater than Wall Street had anticipated, and the shares fell another 9%. But there was no way Fannie was going to be a wet blanket at this party. UBS joined the list of banks being told by the SEC to pay back investors in auction rate securities, but its shares rose 4%.

McDonalds posted a Street-beating profit, and its shares traded to new a all-time high. God Bless America.

The SPI Overnight was up 72 points.

Shares in BHP ((BHP)) and Rio ((RIO)) fell 2.5% in offshore trade.

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