The Overnight Report: China Fails To Stimulate

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This story features BHP GROUP LIMITED, and other companies.
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By Greg Peel

The Dow closed down 73 points or 0.8% while the S&P lost 1.3% and the Nasdaq 1.9%.

Asia had the first opportunity to respond to the announcement of the US$600bn Chinese stimulus package on the weekend and the response was positive. Japan jumped 6% and Hong Kong 4% and Australia managed a cautious 1.4%. Europe also went hard early and commodity prices surged as short coverers scrambled. New York chimed in with a 216 point gain in the Dow from the bell, but that was to be the end of it.

Initial excitement failed to generate any conviction once more, and the Dow drifted to be down 183 points around 3.30pm. A late rally meant the index was down only 73 points on the close, but once again volume was very light. No one was inclined to join the buyers and there wasn’t a lot of support for the sellers either. At the end of the day, Wall Street questioned just what great benefit the US would glean from a Chinese fiscal stimulus package anyway.

In the meantime, large electronic retailer Circuit City filed for bankruptcy. General Motors shares just kept getting lower as the incoming and outgoing administrations argue about auto industry rescue packages. Goldman Sachs shares continued their downward drift as management declared all options to be on the table, including buying a deposit bank, merging with a commercial bank or just re-privatising. Fannie Mae (remember them?) posted a US$29bn loss for the quarter and suggested it may have to tap the TARP for assistance despite having already been effectively nationalised. AIG announced a US$25bn loss and the government announced a restructuring of the original rescue package. The initial US$85bn loan has been reduced but assistance has now been boosted to a total of over US$150bn of taxpayer money to prevent the failure of this leviathan that is too big to be allowed to fail.

China-Schmina. There was nothing much for anyone to get optimistic about in the US last night.

It was a wild old night in the oil market. Shorts madly covered early in the session as the China story drove buying interest, sending crude up over US$4 to US$65.20. The global recession sellers then took over, and the price was slammed back down to US$60.90 – a new low. A late rally ensured a close of US$62.41/bbl which was a US$1.37 gain for the session.

That is the second time the shorts have tried to push oil through US$60/bbl and failed. The market believes that if they succeed on a third attempt, oil is going to US$50. But if they fail once more, a floor is in place and oil can drift higher.

Base metals also exploded out of the blocks in London, with copper jumping 11% and double-digit moves also popular among other metals. But again it was a case of short-covering early, and when oil turned around metals followed suit. Copper finished the session up 4% and nickel 3%, while the rest of the complex closed slightly weaker.

One commodity that didn’t follow the up-and-down-again pattern last night was natural gas, which finished the session up 7%. Oil and base metals tend to be cowboy markets, in which the real users battle it out with the speculators and commodity fund investors. However natural gas has never been much of a playground in the past and as such has managed to stay away from wild speculative fluctuations. Natural gas is growing in importance as a cleaner energy source globally (witness the goings on in the Australian gas market lately) and as such is quietly doing its own thing.

Gold was another commodity that held its rally last night, but then gold is not a commodity. The jump in oil and metals helped gold out of the blocks but it is the printing of banknotes globally that is keeping gold in focus as a monetary inflation trade. As forced redemption selling dwindles, the market expects gold to continue its drift northward. But don’t be surprised by sudden bouts of volatility.

The SPI Overnight fell 58 points or 1.4%, suggesting today’s session will erase yesterday’s gains. It was, however, a strong night overseas for shares in BHP Billiton ((BHP)) and Rio Tinto ((RIO)).

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