Daily Market Reports | Oct 14 2008
By Greg Peel
The Dow rose 936 points or 11.1% while the S&P rose 11.6% and the Nasdaq 11.8%. The rally in the Dow was its biggest in history in points terms and its biggest percentage rally since 1933.
In Europe, London’s FTSE was up 8.3%, France’s CAC was up 11.2% and Germany’s DAX was up 11.4%.
The rally in Europe came as Europe was the first to break from the usual G7 wish-wash and announce sweeping bank deposit and interbank lending guarantees. Before Europe had a chance to open, the Australian government was forced to make similar guarantees which thus sparked our own 5.6% rally. Europe opened strongly but it was always going to be a case of holding one’s breath. What would the US do?
Clearly the US had no choice but to follow suit. Were there no interbank guarantees among US institutions and insufficient deposit insurance then money would have simply flowed out of the US and into wherever was deemed to be safe. As we speak, the US Treasury, Fed, FDIC and the CEOs of all major banks are meeting in Washington to nut out the US solution. There is little doubt an announcement will be made before the beginning of trade tonight. We should also learn more detail on the intentions and implementation of the TARP.
Wall Street did actually stumble at the blocks. The Dow opened up over 400 points but began to give them back, losing over 100 points of the rally in the first half hour or so. But then came the other announcement Wall Street had been waiting for. Morgan Stanley announced it had sealed the deal with Mitsubishi Bank. The Dow turned around, and from then on it was all one-way traffic.
Morgan Stanley shares closed 85% higher.
As world stock markets soared, so too did commodity prices. Commodity prices had been equally beaten down in capitulation selling on Friday, and the turnaround was equally as spectacular. Oil rose US$3.49 to US$81.19/bbl. In London, aluminium rose 2.5%, zinc 3.5%, lead 5%, tin 6%, and nickel 7%. And bellwether copper rose 12%.
The Aussie dollar reacted to these commodity price moves. The Little Battler has been having a torrid time of it of late, knocked down by weak commodity prices, carry trade unwinds, interest rate cuts, and then the government’s guarantee package. In the period from Friday night to Monday night the Aussie has marked a rise of more than five cents to US$0.6994.
Gold was the only victim on the night, losing ground as investors felt confident to exit the safe haven and dive back into the maelstrom. Gold fell US$16.40 to US$831.20/oz.
The SPI Overnight was up 306 points, or another 7.3%. So – is this it? Have we marked the bottom?
It is important to appreciate that the sharpest and most extensive rally periods occur not in bull markets, but in bear markets. We have had, and will today continue to have, a classic snap-back rally.
It was Columbus Day in the US last night, which is one of those half-hearted public holidays. The NYSE was open but the bond market was closed. It is bond markets that are driving the financial markets at present, so last night’s rally in the Dow was on anticipation that lending might start to thaw. The signs in Europe were positive. But volume on the NYSE was holiday-light, driven not by a wave of institutional and retail buying but by professional short term buying and scrambling short covering. This is your classic bear snap-back scenario.
Veteran traders will always tell you to wait for at least Day Two, or even Day Three of such an event to thus decide whether the rally has momentum or is only fleeting. We have to expect that there will be professionals who bought low taking profits at some point. Nor does the rally mean the end of redemption selling. Nor does the rally end the need for the ongoing global deleveraging process.
If Thursday on Wall Street was marked with sheer panic, then Monday was also a day of panic, only this time it was to the upside. There are no fundamentals in this market, only blind fear one day and possibly blind hope the next. That is not to say that the global government rescue packages are not going to make a difference. But what they achieve is to put a floor under global banking. Reality is about to bite in the US as the third quarter results season commences and companies announce their new guidance. Forecast earnings will be slashed across the board.
In order to be confident we have seen the low we need follow-through. This snap-back rally can run harder yet, but until hope becomes more than just hope, and real confidence can return, then we are still very much in a bear market. It’s now up to the real fund money and retail money to re-enter on the buy-side.
Those on the ball might recognise that the line that follows my title for today is “in our Yellow Submarine”. We are still underwater.
