Daily Market Reports | Jan 10 2009
By Rudi Filapek-Vandyck
The much-feared unemployment report in the US is finally behind us. It was bad, as widely expected, but not disastrous. But bad nevertheless. Wall Street decided to act to the downside closing the first week of the new year with the biggest losses since that memorable week in November.
There was excitement in the commodities sector, however, but we’ll get back to that later. First, let’s talk shares.
The Standard & Poor’s 500 Index has rallied 18% since plunging to an 11-year low on November 20 leading many experts to conclude the worst is probably behind us. However, the first week of the new year saw the index shedding 4.5% as US employment data revealed the first back to back monthly losses of more than half a million jobs in seventy years. Combine this with US retailers reporting worse- than-expected holiday sales and it is clear there is pressure on the US consumer this year.
On Friday, the S&P 500 lost 2.1% to 890.35, with financial and energy shares the biggest losers for the day. The Dow Jones Industrial Average fell 143.28 points, or 1.6%, to 8,599.18. The broader Russell 2000 Index, a barometer for small US companies, fell 4.1%.
The legacy of eight years of George W Bush. We’ll hear a lot about it in the following weeks. Books will be published about this. Is George W the worst president in the history of the US? Whatever the answer other commentators have already pointed out the US economy, and therefore by default the rest of the world too, is in its most perilous state since the 1930s, if not worse.
Friday’s unemployment report marked the last major release of economic data under the presidency of George W. And it was bad, signalling the US is facing some grim quarters ahead. Few economists are doubting the numbers will continue to look bad for many more months, for employment data are a lagging indicator. US employers cut 524,000 positions in December, capping the worst year for firings in the US since 1945. As a symbol of eight years George W, and the advent of Barack Obama, script writers in Hollywood would have a difficult task in coming up with a better one.
Of course, whether Obama will turn out to be the saviour of a nation in distress remains yet to be seen. His speech on Friday has already been interpreted as “more government please” and “only the government can save us out of this mess”, sparking wide debates whether this is a workable concept. Can government spending pull an economy from the abyss?
Investors worldwide are hoping the answer is yes because this is the concept that is currently on the table, not only in the US, but also in China and in many other countries worldwide. Europe is gradually warming to the concept as well, but the Europeans are widely believed to have moved too slowly already. Don’t be surprised if Europe remains in dire straits for longer than most of the rest of the world. That is, if the concept of government spending is going to be successful.
Go short euro has become a popular theme in many strategic currencies reports entering the FNArena inbox these days. On Friday, however, the pressure was once again on the US dollar as investors took Obama’s “more government” speech as a negative for US government finances, and thus for the greenback.
Another story that will continue to generate headlines in the days and weeks ahead is the future of Citigroup. Special memo to Rip Van Winkle: while you were asleep the world’s largest financial institution has not only become a lot smaller, it is fighting for its survival. Rumours in the street have it the Federal Reserve is working behind the scenes, and pressuring the Citigroup board into creating a much smaller institution still. In other words: assets have to be sold.
Enter the latest announcement that Citigroup and Morgan Stanley are considering combining their stockbrokerage operations to create the world’s largest in its kind. It’s being dressed up as a win-win for both. Read: Citigroup is being forced into this via the Fed.
On Friday, Citigroup shares slid 41 cents, 5.7%, to US$6.75 as former Treasury Secretary Robert Rubin resigned from his position as senior counsellor. Rubin, who advised Citigroup as it lost US$20 billion in the subprime mortgage crisis, won’t stand for re-election to the board.
Meanwhile, crude oil prices had their fourth day of losses since spiking higher on geopolitical tensions in Gaza and Russia. West Texan Intermediate sweet crude slumped a further 2.1% on Friday to the key technical support level of US$40.83 on the New York Mercantile Exchange. Crude oil’s swift retreat from what temporarily looked like a return to the US$50 arena has triggered a further downgrade in price expectations for the year at Deutsche Bank. Analysts reportedly lowered their WTI price projections to US$45 per barrel for the first quarter of 2009.
Oil’s price slump has also triggered a review at Barclays Capital in London, with the team of commodity chartists over there issuing the following comments:
“We have been looking for upside in crude. We have been incorrect. The downside move has delved deeper than we would like to see; as such, it looks likely that WTI and Brent are going to make a lower low before a potential base. Given the extent of the move in crude, we are on the alert for a strong Q1 bottom. At this point, however, another bearish leg seems to be unfolding. In WTI, the market is likely to retest the late December trough near 35.20 and likely below (handle and trendline support come in at 29.55-30.00). On the topside, resistance should be found between 43.65/44.25.”
However, the tight relationship between crude oil prices and other commodities since the final days of calendar 2008 has abruptly broken down this week, and Friday was no exception. Crude oil falling swiftly and looking like breaking through another key technical support level to the downside would normally not bode well for other commodities. Remember mid-2008 when crude oil started to fall from its dizzying highs of US$147 and soon all commodities from grains to base metals to precious metals fell of a cliff?
On Friday, the lead from the crude oil market was ignored elsewhere and base metals had another one of those exceptional up-days that have been occurring rather often over the past three weeks. First, an important factor needs to be taken into consideration (and one that is consistently being under-reported by financial media worldwide): the annual rebalancing of the big commodity index funds, primarily the DJ-AIG and the S&P GSCI indices.
Millions of dollars have been shifted across the commodities spectrum over the past few weeks, in what usually is a low volume period otherwise, to bring commodities portfolios in line with changes in these indices. As this occurred at the same time as Israel was launching rockets into Gaza and Russia tried to outmuscle pro-West Ukraine, there’s no telling how much this has contributed to the sharp rise in the price of crude oil earlier this January. But it has, of course, contributed.
Similarly, some market watchers believe this is what has kept the price of gold down recently, as commodity index changes implied investors had to buy extra oil and lose some exposure to gold.
What about the base metals?
Well, they too have benefited from the frantic portfolio adjustments.
And as prices rose, so too did investor interest. Commodities are back! Quite a few emails entering the FNArena inbox over the past two weeks exclaimed exactly that. Others, however, have been doing their best to pour cold water over this early in the year return in investor enthusiasm. Too hot too soon is their view.
Supporting a bullish view is the fact the Baltic Dry Shipping Index is rising again after dropping some 94% in the second half of last year. Plus the fact that lower prices are pushing weak players in the market into capitulation and this will ultimately be to the benefit of the stronger ones. Plus a belief that government spending in China will resuscitate the country’s big appetite for base materials.
The response by sceptics is simple: look at oil. OPEC countries seem to be complying remarkably well with announced production cuts, but the price of oil is still heading for low US$30s, if not lower, in the short to medium term. The reason? Low demand. Surely, what goes for oil, must also apply to other base materials?
Sector analysts at Barclays, who have arguably been among the most bullish about commodities in the years past, joined the “too firm, too early” camp this week, predicting prices for most commodities won’t be much higher than today’s prices by the end of this year.
That prediction by Barclays may turn out to be true -given the fragile prospects for the global economy this year- but that doesn’t stop investors from taking a punt and pushing up commodity prices in the meantime. We will have to wait until later this year to see whether Barclays analysts are any good in predicting prices during times of economic hardship, but there’s one prediction that is almost guaranteed to prove accurate: volatility will be high.
On Friday, prices for most commodities closed firmer. Traders had noted a large draw in Shanghai (SHFE) aluminium stocks this week (-37Kt) and this triggered market speculation this could be related to Chinese State Reserve Bureau (SRB) buying. Also, market reports over the past weeks suggest the SRB plans to buy 290Kt of aluminium for strategic stockpiling.
Here’s what those above mentioned Barclays analysts had to say about this:
“Given that the country is net long of aluminium there is little strategic need for such stockpiles (unlike copper) so we suspect that any such buying would be an effort to try and support the industry, which is struggling with falling prices, weak demand and oversupply. There are also market reports that the SRB plans to buy 300Kt of zinc and 200-400Kt of copper. This, we believe, is on top of the 150Kt of copper, 300Kt of aluminium, 300Kt of zinc and 150Kt of lead that Yunnan province plans to “purchase” (the details are unclear with some reports suggesting that this metal will be used as collateral for back loans).
“We believe there could be a short-lived bounce in prices as these purchases are made. However, it does not signify an improvement in the fundamentals since this metal will simply be removed from spot supply, as opposed to consumed. It does not change that fact that these markets remain oversupplied and if anything may worsen future fundamentals since these metal stockpiles could be released once the market recovers.”