The Overnight Report: It Could Have Been Much Worse

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This story features RIO TINTO LIMITED, and other companies.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Rudi Filapek-Vandyck

If there’s an apt way to describe last night’s trading session on Wall Street it’s probably: it could have been a lot worse.

Until around mid-way through last night’s session, US equities were touching, and breaking, technical support levels, crude oil was down 10% on OPEC further cutting demand this year and US banks were being slaughtered amidst ongoing worries they are still in need of many more billions of US tax payers’ help funds. One could be forgiven for throwing their hands in the air and asking: when exactly is this going to stop? How much money do they actually need? Are we experiencing something of a bottomless pit here?

The US senate is discussing a resolution to block the second tranche of US$350bn TARP funds being kept available when the new Obama administration steps into the White House next week. This on growing concerns the new administration is going to use the funds to support other sectors of the economy, such as car manufacturers and airlines. TARP was originally set up to keep the US banking sector from disappearing off the globe and Republican senators believe this is what the funds should be used for.

Obama has the power of veto when he becomes the next President of the world’s most troubled nation next week, so all is not necessarily lost, even if the Republican motion attracts a majority of votes later today.

Suffice to say, there was enough around to further spook investors yesterday. Shares in Europe closed lower. Japanese machine orders turned out much worse than expected. The trend in worrying indications from China continues. And oh yes, the European Central Bank cut by 50 basis points, as widely expected. But that’s hardly good news as a majority of experts outside the European union had already formed the opinion that Europe is simply acting too tepidly, too slowly. As a result, Europe won’t be participating in any potential economic upturn any time soon, or so goes the economists’ mantra.

The Dow Jones Industrial Average went as low as 8000 (technical support) and a tiny bit lower around half-way yesterday’s session. By then, the S&P500 had landed at 817, below technical suppport at 822. Crude oil futures were down 10% at US$33.20 – importantly: this was below the low of US$33.40 recorded in November last year. Copper was staring at some serious losses too.

The end of the world was nigh. And then prices stabilised and started rallying, before they retreated again in the final hour of trade, threatening to post another day of losses for US shares, but then a late push kept all indices in positive territory.

The DJIA closed up 12.35 at 8212.49. The S&P500 closed 1.12 points higher at 843.74. The Nasdaq managed a gain of 22.20 and closed at 1511.84.

Volumes were high on Wall Street last night, higher than what we’ve seen thus far in 2009, with traders on the floor pointing at the options expiry tomorrow and the long holiday weekend for US investors ahead.

With renewed concerns keeping US financials in strife -share prices for Bank of America and Citigroup were again being sold-down heavily- energy and resources stocks managed to claw back from serious losses endured in the prior trading session. Both Rio Tinto ((RIO)) and BHP Billiton ((BHP)) shares posted gains of around 3% in the US.

The turnaround in the share market allowed crude oil to jump back to US$36 per barrel. Gold staged a mini-rally to US$816 per ounce, after threatening to test the US$800/oz level earlier, and copper staged a mini-technical recovery towards the LME close on Thursday. Traders in London talked about copper erasing losses on short covering with basemetals.com quoting one analysts as saying “copper failed to get through fairly solid technical resistance towards the lows and bounced back. It looks like shorts are covering intraday”.

Aluminium hit its lowest price level for a month, but managed to stage a come-back, as did other metals.

On the data front, weekly jobless claims in the US came in at 524,000, against a forecast 512,000, while the December PPI fell 1.9% against a consensus expectation of a 2.0% fall. The Empire State Manufacturing Index read minus 22.2, in line with expectations. Those with a bullish bias will tell you: the good news is these figures did not surprise significantly to the downside. Which is true, but they are bad nevertheless. The PPI figures, for instance, once again highlighted the US economy is battling gradual deflation.

The US dollar rose to fresh five-week highs against the euro – see European Central Bank as mentioned earlier.

In late breaking news, an airplane from US Air has made an emergency landing in New York’s Hudson River as a flock of geese reportedly shut down both its engines shortly after take-off.

The SPI this morning is indicating the Australian share market is likely to open higher, which should be little wonder given how BHP’s share price performed in New York.

The worrying fact, say some chartists, is that December lows have now been breached by US share indices, and this may have opened the door to further lows. The good news, say other chartists, is that a rally followed after just a small breach. The coming in power of Obama might trigger a rally next week, and this might override the technical worries as expressed by the first group.

In more late breaking news, the US senate has decided Obama will have access to the second tranche of TARP funds. This can only be seen as significant positive news for US banks (who are likely to be broken up throughout the year, but also likely to survive, one way or another).

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