Daily Market Reports | Nov 04 2008
By Greg Peel
Note: On the weekend the US moved off summer time, meaning the NYSE now closes at 8am Sydney time and will do so through to next March. Given the last hour of trade, and sometimes the last five minutes, are usually the most volatile, readers must expect the Overnight Report to be available at a later time over summer.
The Dow closed down 5 points while the S&P lost 0.25% and the Nasdaq gained 0.3%.
The extraordinary thing about last night’s trade was that the session’s range was from up 85 to down 70. I was tempted to go back through the records to see just when it was we last saw a session that failed to book a triple digit move in either direction, but that would have been a bit time consuming. I am, however, prepared to guess the 155 range might be the tightest in 2008 but I will bow to any reader who can find a lower range. As for a single digit closing move, well the same applies.
This should be great news, for it means volatility is subsiding, suggesting a level of stability is being found. The VIX volatility index is now down to 53 having hit 86 at its peak. However, given tonight in the US could bring a historical change of government, Wall Street is understandably reluctant to take a big punt in either direction. It will likely be the same tonight as America goes to the polls.
Which begs the question: What move will the market make given either outcome?
From a pragmatically capitalist position, it is accepted that Republican is good and Democrat is bad. Republicans are supposedly the free market capitalists, although given it is the Republican party that in 2008 has created what some call the United Soviet States of America by nationalising the financial system in the face of the credit crisis one might say the old definitions have now gone out the window. The Democrat party is meant to be the more socialist, with a penchant for raising taxes, increasing welfare and increasing government spending and regulation. Indeed, Barack Obama is running on a ticket that includes a policy of capital gains tax increases, while John McCain is in Bush’s income tax rate reduction camp.
On that basis one might assume that if Obama wins, Wall Street sells, and if McCain wins, Wall Street buys. However, there are two reasons why this will not necessarily be the case. Firstly, Obama has been ahead in the polls for months now, so a Democrat win will hardly come as surprise. Wall Street has already factored in a new government and all the ramifications that may follow. Given the events of 2008, they don’t have much to argue about. Secondly, history shows that Wall Street doesn’t really care much who wins in terms of immediate market reaction. That’s because of the previous point in the case of one candidate being well ahead in the polls anyway, but also because it is the uncertainty of the situation Wall Street dislikes rather than ultimate result. In other words, any result means we now know where we stand and can thus get on with it, and that’s considered a positive.
What we do know is that whoever wins they will inherit a mess. Last night again brought dismal economic data, beginning with the October ISM manufacturing index. Any number below 50 means contraction and in September that number was 43.5. Economists were expecting a drop to 41.5 in October but the number was 38.9. This is the lowest level since 1982 which was also a period of recession. The good news, however, was that construction spending only fell by 0.3% when 0.8% was expected.
But then there were the auto sales numbers. In October General Motors’ sales fell 47%. Ford lost 33%, Honda 28% and Toyota 26%. Whoever settles into the Oval Office this week will have GM banging on the door asking for handouts before the seat is even warm.
Wall Street greeted these data with a bit of a shrug. Once upon a time such numbers would have sparked a big sell-off but realistically these are exactly what Wall Street is expecting now, and the sell-off has already occurred. The election may have helped to stymie any further negativity, but it will be 2009 numbers that are more likely to impact on Wall Street now, not any look-back 2008 numbers.
The only big mover on the night was oil, which fell US$3.90 to US$63.91. While the US ISM number wouldn’t have helped, it was a fall in the Chinese PMI that made a difference, along with news that China’s largest oil refinery is cutting back production and that Korea has reduced imports.
Clearly Chinese demand for all commodities is falling. I must say though – I don’t know about you – but I reckon China will be looking to play a few games with the rest of the world now and cry poor over real demand. A few lower prices, particularly in annually contracted commodities such as iron ore and coal, would be rather beneficial. Who is in a position to argue?
Oil’s fall was also helped by a stronger US dollar, which pushed up again as the euro and pound were sold off ahead of expected rate cuts later this week. Gold responded by slipping US$1.90 to US$721.80/oz. The greenback was also stronger against the yen, allowing the Aussie to continue its recovery, adding better than another cent to US$0.6804 since Friday.
Base metals are now just attempting to consolidate and last night moves were mixed. No metal moved more than 4% in either direction. Copper lost 1.2%.
The SPI Overnight closed down 6 points.
With a 5% move under the belt yesterday for the ASX 200 and no lead out of Wall Street, one might expect the local index to see some profit-taking today. It is, nevertheless, a public holiday in Victoria and as good as a public holiday from lunch time on the rest of the east coast. Australia will also be keen to learn the US election result.
What we do have this afternoon is the “rate that stops the nation”. At 2.30pm, ahead of today’s other big event, the RBA will lower the cash rate by 50 basis points or more. If it is more, we could yet get another kick. Perhaps it will be a quiet market to that point before a few champagne decisions are made.
Thereafter comes the “race that stops the nation”, but as one wag noted last night the financial crisis of 2008 has ensured that the nation has already stopped anyway. I may have spent all year trying to provide thoughts on stock market direction, but I know as much horses as Michael Costa does about business management. I prefer to have a bob each way on whatever horse has, to me, an appropriate name for the spirit of the time, and no horse sums up my working life over the past months more than Mad Rush. It is also fitting that the horse is a Seppo. The fact that it is also the favourite is merely a coincidence, although I believe that if you are the favourite then by experience you are not. Favourites rarely win the Melbourne Cup.
Happy punting.
