Daily Market Reports | Oct 28 2008
By Greg Peel
The Dow fell 203 points or 2.3% while the S&P lost 3.2% and the Nasdaq 3%.
“Rolling thunder” was in play once again last night as the Dow opened down 231 points following falls in Europe, which in turn followed falls in Asia. Falls of 6% in Tokyo and 12% in Hong Kong ensured a weak start in Europe, thus ensuring a weak open in New York. But the open was the low in New York and the buyers soon moved in to push the index into positive territory, ultimately hitting 221 points up at lunch time. That was enough to ensure Europe actually closed largely unchanged on the session.
But the nature of the current market is that any upside move is seen as a lingering selling opportunity, and the selling has not yet expired. The Dow thus moved back to square by 3pm and Wall Street braced for the three o’clock wave.
The three o’clock wave did not arrive, and indeed the day’s volume was relatively low suggesting the big selling of earlier in the month may be waning. Nevertheless, a market rally needs buyers and the buyers are still too tentative in general to jump into this market in numbers. With ten minutes to go, the “market on close” orders dropped the Dow by 200 points in a blink.
The positive attitude prevailing at least until lunch time can be put down to “things beginning to happen”. The credit market continues to take baby steps towards easing, but last night the US government’s TARP finally swung into action. Requests by banks for capital injections are rolling in and the Treasury has begun to allocate funds and purchase preferred stock. For its part, the Fed has made its first forays into the commercial paper market.
Another positive was news that September new home sales in the US rose 2.7%, although these numbers are always spurious and subject to revision.
The most popular topic of conversation now is interest rates, with high expectation that the Fed will cut by 50 basis points on Wednesday night to 1.5%. With inflation now presumably on a downward trend given steep falls in commodity prices, and the US economy looking decidedly weak, Wall Street feels there is little to prevent the Fed from cutting its funds rate. The overnight cash rate is already trading at under 1.5%, indicating the Fed has not made any attempt to withdraw funds. The market will nevertheless be closely focused on the Fed’s accompanying statement even if it does get the 50 points.
After the Fed makes its move, attention will then move to the October 6th meeting of the European Central Bank. Similarly, the market expects the ECB to cut by at least some amount from its current 3.75%. An ultimate move to 2% is a popular assumption and this is reflected in the fact the euro continues to trade lower against the greenback.
The US dollar was thus once again higher against the euro and pound last night but the yen is continuing its surge as carry trade unwinding rules the day. There is now talk the Bank of Japan may have to step in to put a lid on the currency. On the flipside, the Reserve Bank of Australia was yesterday forced to step in and support the Aussie dollar as it threatened to collapse below US$0.60 in the carry trade reversal tsunami. The Aussie has ended one and a half cents lower from Friday at US$0.6046.
The oil market has now put the disappointing OPEC production cut behind it and is basically tracking the stock market. When the Dow reached its highs oil traded up towards US$66/bbl but the afternoon wane meant oil once again closed down – by US93c to US$63.22. It has not escaped the oil pit that the price of gasoline in some parts of the US has now fallen below US$2/gal having peaked over US$4/gal a few months ago. It will be interesting to see what effect this will have on what has been sharply falling demand.
Gold is now consolidating and had a rare day of little change – down US50c to US$730.30/oz. Nexts month’s G20 meeting has been dubbed the new Bretton Woods and if its outcome is the same as the first one after WWII then gold will once again be the reserve currency and the yellow metal will take off. The US will fight tenaciously against such a move, however, and such an outcome is seen as only an outside chance.
The big story last night away from the glare of New York was London metal prices. Having been absolutely slaughtered, it was always a case that a bounce in metals must come. Last night technical levels brought in the buyers and sent the shorts scrambling. Zinc rose 1%, aluminium 3% and lead 5%. Bellwether copper put on a 7.5% surge but at the 7pm late close the big winners on the day were tin and nickel, up an extraordinary 13% and 16% respectively.
Mining company investors should not take this as a sign everything will now turn around. Base metals have been oversold, and there will be plenty of short-covering, however just as in the stock market there will be commodity fund redemptions forcing coversion into cash, and that means rallies will be snapped off and volatility will continue to rule.
The almost ethereal nature of the late sell-off in New York combined with some better pricing in base metals ensured the SPI Overnight remained stoic, closing up 2 points against the Dow’s 200 point fall.
A quick note of thanks to all those who visited Rudi, Andrew and myself at the trade show last Friday and Saturday. It was heartening to meet many happy subscribers, and encouraging to be able to welcome many new subscribers on board.
