Daily Market Reports | Aug 14 2008
By Greg Peel
The Dow fell 109 points or 0.9%, but the broad market S&P only fell 0.3% and the Nasdaq just 0.1%.
The Dow’s downside outperformance reflected more big hits for the big component commercial banks along with Amex, and a Moody’s downgrade on General Motors. Financial stocks generally led the Dow and S&P lower, as more analysts decided they, too, better start downgrading their earnings expectations for the financial sector and reduce ratings in light of the recent bounce. It was a bit of a scramble, but once again any financial sector rally that is too sharp will have its head cut off by reality. Falls of 4-8% were commonplace across most of the big name banks and brokerages.
It is probably a good idea to remember at this point that the US is at the height of the summer school holiday – sorry, vacation – period and activity levels are a bit thin. Think Australia in January. So volumes are down and volatility is up, as one might expect.
Wall Street opened on a sour note when the July retail sales number came in at a negative 0.1%. This looked disappointing given everyone had a stimulus cheque to spend, although take out woeful auto sales, and the read was actually +0.4%. Even still, this number is quite a weak one by American standards.
As this number hit the boards, department store giant Macy’s was also warning of tough times ahead. Farm equipment maker Deere also disappointed with only a 7% jump in profits, and its shares fell 3%. Wall Street believed that with agriculture the way it is, Deere should have reaped some benefit, but not so.
But outside of the here-we-go-again financial slide, the major news last night was a big drop in US weekly gasoline inventories – three times the drop expected. Omigod! Demand has returned! Oil jumped US$2.99 to US$116/bbl.
Demand has not returned. Apart from the fact weekly oil inventories are as volatile as one might expect weekly numbers to be, and before 2007-08 met with rampant indifference, the reason behind the drop is that refineries are cutting back their capacity. Now there’s a shock. Oil’s fallen US$30 and the refiners decide maybe they don’t need to produce quite as much.
The reality is, of course, that the Johnny-come-latelies who had bought oil over US$140 because they were told it was going to US$200 have recently been bailing out, and pushing the oil price down fast. Others have been madly shorting. Nothing ever falls that far in one go, so we’ve had a snap-back.
And last night we had a snap-back in everything that’s been oversold in the short term. Gold jumped US$13.10 to US$826.30/oz. Both oil and gold advanced despite another slight rise in the US dollar, and that rise belied the weak retail sales data. However, once again we have to remember that exchange rates are relative.
Last night we learned that second quarter Eurozone industrial production fell 0.6%, that the Japanese economy contracted 2.4% in the second quarter, and that the Bank of England believes there may be zero economic growth in the UK for the next twelve months. The latter was accompanied by a suggestion that no UK rate rises would be needed, as inflation will start coming down too. Ergo, the euro, yen and pound all fell – dollar up. The Aussie had a remarkable 24 hours, falling to below US$0.86 in local trade yesterday before the rubber band reached its limit of stretch and the Little Battler shot back up again. It is now as good as unchanged at US$0.8750.
And base metals have been part of the fun as well, so they, too, were set for a snap. And it so happened that weekly copper inventories marked a rare fall last night, so the base metals complex followed oil and gold and rushed up – copper jumping 4%, aluminium 1.5%, zinc 3% and nickel 7%.
The SPI Overnight lost 4 points but before you ask, BHP and Rio were both up around 3% offshore.
Where are commodity prices going from here? Don’t look at last night’s jumps – look at the weak economic data out of the US, Europe, the UK and Japan.
