Daily Market Reports | Nov 05 2008
By Greg Peel
The Dow closed up 305 points or 3.3% while the S&P gained 4.1% and the Nasdaq 3.1%. The Dow breached the 9600 mark but more importantly an enthusiastic S&P broad market made it back into four figures for the first time since early October, closing at 1005. The Nasdaq put together six consecutive days of rally for the first time in a year.
It was a quiet Monday and Wall Street was expecting an equally quiet Tuesday as America went to the polls. Thereafter history shows that an election result usually sparks a rally no matter what colour the victor (red or blue) given the end of uncertainty. But last night Wall Street was not prepared to wait, perhaps because an Obama victory is already looking likely or perhaps because rarely has a market been beaten down quite so much ahead of that day in November, and November is often a positive month that leads Wall Street out of a devastating October.
While a 300 point rally still implies an unnerving level of volatility in the market it is notable that the VIX volatility index fell another 12% last night to 47, closing in on a value half that of the panic peak. At the same time the US dollar took a rare hit as traders moved back into the beaten-down euro and pound despite expectations of rate cuts from those respective central banks this week. The counterintuition was also true for the humble Aussie, which despite being hit in the local session following a larger than expected RBA rate cut closed the 24 hour period up almost two cents to US$0.6985.
The reasoning seems backwards but the logic is there. The US was the first economy to suffer as a result of the credit crunch as the world initially assumed the problems were isolated. When this proved to be naive, the rest of the world’s economies suffered. The catch-up play meant the US dollar has surged in the last couple of months as leveraged positions across the globe have been unwound and money has flowed back to the source. This was a rubber band that would always stretch too far, and last night the first signs emerged that markets see the global adjustments as approaching their conclusions. At the end of the day, about every government is currently printing money to save their economies, but no more so than in the US. The US dollar must eventually settle back. Last night was volatile for currencies and such volatility will remain for some time. Ultimately the US dollar must drift back to the pack.
Australia is one economy in which the government at least has a fiscal surplus to spend, if not a current account surplus. The Aussie is also a currency linked to commodity prices, and all things being equal a weaker US dollar means higher world commodity prices. The RBA rate cut did not escape Wall Street last night, and as central banks across the globe join in cutting rates the weakest currencies must again be isolated. The US runs a current account deficit and a fiscal deficit that is only getting bigger and bigger. Germany, Japan and China all run current account surpluses.
Gold jumped US$41.30 last night to US$763.10/oz on the back of US dollar weakness. Base metal prices in London also took off, with tin up 2%, aluminium and lead up 3%, copper and zinc up 5% and nickel up 9%.
Oil surged 10%, jumping US$6.62 to US$70.53/bbl. While the oil move had a lot to do with the US dollar, an extra kick was provided by speculation that OPEC would make further production cuts in December and news that US refineries were also cutting back production, which sent the gasoline price surging and crude following in its wake.
This is all great news for the Aussie market, and that was reflected in the SPI Overnight which jumped 134 points or 3.2%. Perhaps the sign was there yesterday when a local nag got up to beat the foreign pretenders. There should be further buy orders being placed through hangover hazes this morning.
The bad news however, is that Wall Street is still trading on light volume. Post-election rallies are par for the course, and not yet enough to get the real money off the sidelines. The script demands that we have a solid rally into Christmas despite a constant stream of weak economic data, because that’s what happens in bear markets. Remember the old adage “Sell in May and go away”? Well May saw the peak of the previous significant bear market rally (50% of the drop to that point) and we have faltered ever since. If you sell in May you’re meant to start buying back in September, unless you’re in a bear market which usually sees a culmination of weakness in October. Thus you wait till November to buy, jumping into what is a standard “Christmas rally”.
If we continue to play to the script we could see another significant rally which could trace back as much as 68% of the “crash” from the breakdown level (5000 in the ASX 200). That would put us at about 4600 , or another 400 points above yesterday’s close. At that point it would be time to take a breather.
The sharpest rallies always occur in bear markets. This fact is not lost on those sideline dwellers who want to see real stability – smaller moves backed by better volume – rather than ongoing volatility. The VIX index is falling because traders are dumping the put option protection they bought over the last couple of months, not because the market moves are consistently getting that much smaller yet. We need a bear market rally to shake of what hopefully will be the last of the extreme volatility, but from that point there is still plenty of risk to the downside once more.
Indeed, every day or two’s rally comes with a risk that the next day will see a sharp drop. Those who failed to sell the first time are still out there hiding around corners. In order to find the beginning of an actual bull market we need to see some low points again, but not new lows. A succession of higher lows would tempt the buyers back in in earnest. Stock markets always turn 6-9 months before the bottom of the economic cycle. What we don’t yet know is just how deep and long this cycle might be.
