Daily Market Reports | Oct 31 2008
By Greg Peel
The Dow closed up 189 points or 2.1% while the S&P gained 2.6% and the Nasdaq 2.5%.
The Dow shot up 276 points from the opening bell on the release of the first US third quarter GDP estimation. Following growth of 2.8% in the second quarter economists were expecting a big turnaround, with consensus at negative 0.5%. The number came in at only negative 0.3%. Woohoo!
Breaking down the number provided an ugly picture, with consumer spending down 3.1% (first decline in 17 years, biggest drop in 28) and incomes down 8.7% (the biggest quarterly decline since 1947). Last quarter’s tax rebates distorted the income figure, but suffice to say the GDP number was the worst since 2001. The twelve month GDP stands at 0.8% growth, but economists are expecting the really bad quarter to be the fourth.
Two things to consider following this result: (1) it will be revised at least twice before the fourth quarter is through and revisions can often be significant; (2) it was an ugly number, but look at the ugly stock market.
The Dow peaked only 15 minutes into the session and then the sellers came in – those “selling the fact” after what was a big rally two days earlier. There was similar selling of the fact on Wednesday following the Fed rate cut. But just like Wednesday, the buyers returned and while the Dow was square at midday it was again up 220 points at 3pm.
Three o’clock is of course when everyone stands back to see what might happen and yes – there was some lingering selling which knocked the market down towards square once more. But the buyers wouldn’t have it and so we shot up on the death.
If there is lingering mutual fund selling – and there’s only one more session left – it is likely also joined by simple tax loss selling from funds which work on an October fiscal year. On the other side will be “dress up” buying from other funds attempting to kick their miserable returns up a bit for the month. All this leads to the sort of volatility we’re seeing, and yet again volume was to the light side, suggesting the “real” money is yet to leave the sidelines.
The good news is that Day Two following the big rally was another rally, and this is what veteran traders were holding out for. When the Dow jumped 936 points on October 13 the next session was down 76, and Day Two was down 733. This time we’ve had up 889, down 74, and up 189 – much more encouraging.
Also encouraging is that last night’s London interbank offer rate (Libor) – the rate at which banks lend to each other overnight and upon which global credit markets are benchmarked – fell for its fourteenth consecutive session. The commercial paper market in the US – which companies use to fund their day-to-day operations – increased for the first time in seven weeks, reflecting the Fed’s incursions that began this week.
Softly, softly, catchy monkey.
The VIX volatility index fell 10% to 63 last night, continuing a rocky but definitive drop from the high of 89 at the peak of the turmoil this month. The lower the VIX falls, the more it indicates stability is returning, and stability is what those sidelined buyers want to see before they go diving in.
The US dollar response to the GDP number was unsurprisingly to the upside, which meant the commodity rally of the past couple of days was snapped off. After some extraordinary moves it is no great shock that commodity prices should correct, and so in London we had copper down 7%, nickel 9% and zinc 8% amongst a general fall.
Oil also fell back, losing US$1.54 to US$65.96/bbl. Gold didn’t mis out either, dropping US$13.20 to US$737.70/oz.
As the yen was again slightly weaker against the US dollar, the Aussie dollar was still able to maintain its fightback, rising nearly another two cents to US$0.6842.
Between these commodity price corrections and a stronger Dow, we had the SPI Overnight down 4 points.
Lower commodity prices will likely crimp the local market today, given it was the resources sector which led the big rally yesterday. It is also a Friday, which means square up (sell) positions for the weekend, but the end of the month, which could yet bring some “dress up” buying. If it is a sell off, it should not discourage investors too much being the end of the week/month. Things are looking healthier.
The only thing scary about tonight should be All Hallow’s Eve.
