Daily Market Reports | Oct 30 2008
By Greg Peel
The Dow closed down 74 points or 0.8% while the S&P fell 1.1% but the Nasdaq rallied 0.5%. The rally in the Nasdaq was due to speculation that leading tech Apple would buy back stock at this beaten-down level.
The interesting thing about the 74 point fall in the Dow is its eerie similarity to Wall Street’s response the day after the 936 point rally of October 13. The bad news is that on October 15 the Dow fell 733 points on its way to a fresh closing low.
Veteran traders always wait until Day Two after a big rally to gauge whether that rally might hold. Clearly on October 15 it didn’t. Tonight in the US brings the much anticipated third quarter GDP initial estimate. Hence there is scope for ongoing volatility. We are also counting down two more sessions to the end of the mutual fund redemption window. Have funds been holding off to the death? Or is the selling all but expired?
Either way there is scope for more selling which is unlikely to give us a realistic indication of what next week – November – might bring. Credit markets continue their tenuous easing and the US government’s TARP program is swinging into action. In the next couple of weeks the first auctions will be held for toxic debt instruments. And last night the Fed cut its funds rate by 50 basis points to 1.0%.
Critics of the Fed suggest the 50 point cut was enacted simply to appease the market given the market had already priced it in. No cut, or a cut of only 25 points, may have tipped everyone over again. A bigger cut – 75 to 100 points – may have signalled things were still desperate and then tipped everyone over again. So the Fed delivered 50 points. Many observers suggest the difference between 1.5% and 1.0% will make little difference to proceedings at this point and have called the cut merely a “placebo”.
Either way, we are now back at a Fed funds rate level of 1.0% for the first time since 2004, when Greenspan slashed the rate aggressively in the wake of 9/11 and started the whole debt bubble in earnest.
The accompanying Fed statement held no surprises. Yes – the economy is slowing dramatically. Yes – it is expected that inflation now must surely fall. This leaves the way open for perhaps another 25 point cut in December, analysts suggest.
Unsurprisingly, Wall Street traded in a relatively tight range ahead of the 2.15pm Fed announcement last night. The Dow was up about 150 points at 2pm and fell to be down about 80 points immediately after. Buy the rumour, sell the fact – no big deal. Then another Fed announcement came across the wires.
The Fed had previously arranged US dollar swap lines with ten leading economies in an effort to help those countries stem the volatility in currencies. This just means the Fed takes on euros or pounds or Aussie dollars in exchange for greenbacks to stop panicked collapses. Last night the Fed extended that program to “emerging” markets, adding Brazil, Mexico, Korea and Singapore to the mix, noting these were important but “well-managed” economies. The comment was to appease anyone who might take the swaps as indicating those countries were in dire straits. We recall that the US told Iceland no dice.
Whether or not this made the difference or whether Wall Street is just now in a buying mood anyway is unclear, but the market recovered to be square and at 3pm suddenly took off, rising over 270 points. At about 3.45pm – dang – I had no milk for my coffee, and so I shot up to the corner store wondering whether it would be up or down 1000 ten minutes later. It was down 160 points.
Apparently some erroneous story on a profit downgrade at General Electric came across the wires (it was old news) which may have spooked the market, but realistically it was probably just last minute sellers at it again. Funnily enough, while the Dow computer often takes a good five-ten minutes after the bell to find its closing price and it may still move a few points, last night it went from down 160 to down 74 all after 4pm.
Another positive impetus that got lost in the wash of waiting for the Fed last night was that China dropped its interest rate by another 27 points to 6.66% yesterday ahead of the Wall Street open. Any stimulus for the Chinese economy can only be a good thing.
Despite a 50 point cut being “baked in” to market expectations, the US dollar responded accordingly and fell against all but the yen last night. The yen fell too, which is good for settling the panic. That double-whammy gave the Aussie a nice little kicker, and it jumped over two cents to US$0.6667 – a perfect two-thirds.
The greenback’s fall was enough to further encourage the commodity price reversal, but up until last night oil had refused to play. This time oil jumped significantly – by US$4.77 to US$67.60/bbl. The reason was not only a lower US dollar, and a supposedly stimulatory rate cut, but the weekly inventory figures. US gasoline inventories have risen every one of the last five weeks and last night the market expected more of the same demand reduction. But – shock – the opposite was true. Gasoline inventories fell. Gas at the pump hit as high as US$4/gal at the peak of the crude price but has just fallen under US$2/gal. Have we returned to a tolerance level? Can I get the Hummer back out of the garage?
One swallow does not a summer make.
There was nevertheless little controversy surrounding the extraordinary ongoing technical recovery of base metal prices from their oversold levels. A rate cut in the US, a rate cut in China, a weaker greenback – it all led to another surge in London. Copper was up another 8%, nickel another 10% and zinc, which has been only a spectator to date, suddenly leapt 9%.
Gold did nothing spectacular, but with a US$2.50 gain it breached back over the US$750 level at US$750.90/oz.
The SPI Overnight added 33 points and the ASX 200 might today test the non-believers who dominated a disappointing session yesterday.
