Daily Market Reports | Jan 14 2009
By Rudi Filapek-Vandyck
The first two weeks of 2009 mark the fifth worst start to a new calendar year for US equities since 1927, according to Bloomberg television. However, last night’s session actually generated some positive news with indices retesting major technical support levels during the session, and managing to rally back upwards towards the closing bell.
The Dow still closed 25.41 (0.30%) lower at 8448.56, but the S&P500 closed with a gain of 1.53 points at 971.79 and the Nasdaq gained 7.67 points (0.50%) to close at 1546.46. The Russell 2000 index, a measure for smaller US companies, even managed to close more than one percent higher on the day.
This optimism is likely to continue into the Australian trading session today.
On Wall Street, persistent weakness in industrials was offset by a recovery rally in financials and energy and resources stocks.
Having said all of the above, it is clear that overall investor sentiment coming into the new year remains fragile and cautious, even with parts of the stockbroking industry seemingly eager to get a rally going; any rally anytime and anywhere!
Worries about a dismal outlook for corporate earnings persist after a surprisingly much worse than expected start of the reporting season by aluminium giant Alcoa on Monday. Yesterday, the limelight was also on General Electric. Analysts at Barclays issued a report suggesting earnings will be worse than currently anticipated by the market, threatening GE’s AAA credit rating at Moody’s and dividend payouts and that was not something investors were looking out for.
Talking about dividends, top economic adviser to the new president-elect, Larry Summers, told Congress in a letter yesterday the soon to be in function Barack Obama administration will not only seek to limit executive compensation by financial institutions that get “exceptional assistance” from the US government’s financial rescue fund, it will also seek to cut dividend payments.
Policymakers in the political arena and at the Federal Reserve Bank were firmly on investors’ focus during yesterday’s session. A potential scandal was developing for Treasury Secretary-designate Tim Geithner who has been meeting with the Senate Finance Committee to discuss two problems that have come to light regarding his personal finances. One of them involves an alleged failure to pay self-employment taxes when Geithner was working for the International Monetary Fund; the other concerns the employment of an immigrant housekeeper who may have been temporarily illegal as her work authorization document had expired when she was hired by the Geithner-household.
Geithner is widely regarded one of the key nominations for the new Obama administration. Early indications are that both problems are unlikely to prevent him from taking up his position on January 20.
President-elect Obama himself added some uncertainty as well by declaring he wants to “fundamentally change” the way the TARP has been administered. Obama’s criticism about how the Bush administration has been handling the bailout thus far is supported by many in the US media, Congress and financial sector. But it does create more uncertainty about the way forward nevertheless.
And last but not least, Federal Reserve Chairman Ben Bernanke -whose nickname “Helicopter Ben” has been reformed into “Spaceshuttle Ben” given the size of the bailouts and other efforts to get the US economy going- used a speech at the London School of Economics to warn the world more may need to be done to solve the current problems.
Bernanke suggested the US government may need to buy or guarantee tainted assets that are still on US banks’ balance sheets to successfully revive economic growth. “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Bernanke reportedly said, adding: “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.”
In a further move to widen present measures, the Federal Reserve will begin a program next month to bolster securitization markets for consumer credit. The Term Asset-Backed Securities Loan Facility, the Fed’s newest emergency program to increase liquidity, will finance up to US$200 billion in securities backed by loans to small businesses, students, credit-card holders and car buyers. The facility has US$20 billion of support from the US Treasury.
Meanwhile, economic forecasts continue to trend lower, with the latest poll by Bloomberg indicating the US economy is now expected to shrink by 1.5% this year. This compares with a median negative GDP growth expectation of minus 1% in December.
Oil traded initially lower, at US$36 per barrel, but managed to rally towards a small gain on further indications OPEC might again cut production at its next meeting. This was all traders needed to start buying back into base metals and other commodities as well. Gold reversed earlier losses to close unchanged as the US dollar strengthened throughout the day.
Base metals, however, all posted strong recoveries. Mind you, Basemetals.com quotes several traders on the LME floor in London who believe support from index-reshuffling is starting to wane. If the market’s attention shifts back towards the dismal global economic environment, current prices are likely to come under pressure again, they warn.
Meanwhile, yesterday’s jumps in prices for the likes of copper, nickel and zinc all occurred despite further rises in official inventories, except for tin.
LME stocks for copper rose by 5,350 tonnes to 374,850 tonnes, the highest level since late January 2004. Traders in London said the market has been spooked by China’s State Reserves Bureau (SRB) becoming reticent in resuming its government-ordered copper buying program. Market rumours say the state body has now suspended plans to purchase between 500,000 and 700,000 tonnes of copper. With this in mind, the market failed to react in its usual fashion to surprisingly strong initial Chinese copper imports, up 32% in December at 286,576 tonnes.
Aluminium inventories rose by 10,950 tonnes to 2,432,825 tonnes, the highest since early September 1994. The 156-tonne increases in nickel stocks lifted the total to 78,798 tonnes, close to their recent peaks, which were the highest since July 1995. Zinc stocks jumped by 5,975 tonnes to 268,550 tonnes, a fresh high since April 2006. Lead stocks climbed 575 tonnes to 45,850 tonnes, the highest for two months. Tin stocks fell 90 tonnes to 7,920 tonnes.
The slump in commodity prices is having a big impact on currency markets, with commodity producers Brazil and Argentina seemingly trying to stimulate their slowing economies through devaluations of their currencies.
For Brazil, economic growth this year could fall as low as 1.5%. Last year, gross domestic product for the country is believed to have expanded by circa 5.6%. For Argentina the numbers look worse, with negative growth of as much as 0.9% for 2009 anticipated, compared with positive growth of more than 8% in 2008.
Word from the FX markets is: expect the Argentinian Peso to devalue a lot further against the USD throughout the year.