Daily Market Reports | May 06 2009
By Greg Peel
The Dow fell 16 points or 0.2% while the S&P fell 0.4% and the Nasdaq 0.5%.
It is common for stock markets to take a breather after a big rally and that’s what Wall Street did last night. Monday’s rally was all about apparently improved US housing data which gave the market an added boost in what otherwise might have been a quieter week ahead of the bank stress test results. There was some afternoon weakness as the Dow fell as low as down 64 but again the last half hour was about buying.
These stress tests are nothing if not stressful. Wall Street’s been waiting months now and the tension has been growing, and a delay from Monday to Thursday only added to the pain. The results will not be released until late on Thursday, the Treasury has indicated, which means come Friday morning in New York the market will be responding to their interpretation at the same time the monthly unemployment numbers are released. Oh the stress, the stress.
The late release also means Australia will have first shot (not counting NZ of course) at deciding whether the results are a buy or sell signal. At this possible inflexion point – a big rally that has taken us back to square or better for 2009 – we may be looking at either corroboration of the “less bad” theme or candid questioning of the strength and speed of the bounce. Or maybe it will all be a bit of a fizzer.
One thing is for sure – there’s been plenty of conflicting speculation ahead of the results. One media report had Bank of America and Citigroup (the two voted most wobbly) already preparing US$10bn capital raisings but this has been denied by BA at least. Treasury Secretary Geithner has reinforced the administration’s policy that no large institution will be allowed to fail and President Obama has indicated he did not expect to have to go back to Congress for more TARP funds. The cynics have speculated the whole process will be more theatrical than pragmatic, orchestrated to provide sufficient confidence to the market or at least not shatter it. Then last night a Wall Street Journal report, citing the usual “sources close to the Treasury”, suggested 10 of the 19 banks will be instructed by the government to raise more capital.
The 10 would apparently not include the two better perceived institutions Goldman Sachs and JP Morgan, but surprisingly the bank expected to need the biggest injection is Wells Fargo, which last year became America’s largest bank by market cap. Wells received one of the smaller amounts of TARP funds when compared to the basket cases of BA and Citi, so maybe it’s just a case of some catch-up. The good news is – assuming the Journal is on the money – that the government will not see the need to make further emergency TARP injections with taxpayer funds, it will simply instruct the banks to go to the private sector for a bit more balance sheet bolstering.
Indeed, the Journal suggests the fact 10 of 19 banks will be instructed to do so is a more even and less incendiary result than if one or two banks alone were singled out for more funding. In other words, this could be a well received outcome. Some commentators today agreed with this assessment, and clearly the market did not panic. Incidentally, the Journal also added that AIG would not need further government capital.
While Wall Street stressed about stress, Fed chairman Ben Bernanke was speaking to a Congressional committee and telling it, “We continue to expect economic activity to bottom out, then to turn up later this year”. This is not new news from Bernanke, but positive reinforcement is always a good thing.
Bernanke also warned that despite a bottoming out, the US economy would only gradually gain momentum and that activity would be below “normal” for some time. He also warned that businesses would be reticent to re-employ new workers in a hurry, meaning unemployment will continue to rise into 2010.
This is not rocket science, given this is exactly how an economy responds after every bout of recession. If you catch the flu you don’t just suddenly bounce back to extreme health in a day. But Bernanke also warned, “A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall”.
This, again, is simply the stuff of most recessions, particularly harsh ones. Rarely does an economy recover in a single bound, and rarely is there one “V” bounce from the bottom of either GDP numbers or the stock market. The US GDP could show a positive quarter and then another negative one before the positives start to string together some time in the future. Similarly the stock market, which “V” bounced in March, may yet see some disappointment.
For that is the way of things.
It is notable that the ongoing “less bad” theme is supporting the level of confidence on Wall Street – confidence displayed by a tentative shift out of US Treasuries and a VIX volatility index which has now fallen to 33 meaning a lesser demand for put protection – yet gold continues to hold up. It seems that apart from an underlying desire to hold gold as a hedge against the US printing press, investors are still maintaining a bit of a bear market rally “fear trade” hedge in there, at least ahead of the stress tests. Gold slipped US$3.00 to US$896.60/oz last night on a mixed greenback, but it is hanging around that 900 mark despite a 33% jump in the S&P 500.
Speaking of “less bad”, the show rolled on last night with the ISM non-manufacturing index for April, which came in at 43.7 following 40.8 in March. This is still a contraction – the seventh consecutive month – but less bad than April and better than what 42 economists expected. More fuel for Bernanke’s fire.
Markets were quiet elsewhere. Oil fell US63c to US$53.84/bbl. London came back after the long weekend and sold copper down 2%, but the rest of the complex was quietly mixed.
The never-say-die SPI Overnight closed 10 points higher, following what appeared a bit of a weak day on the local bourse yesterday given the 200 Dow rally on Monday night. But when you consider that a lot of Monday night on Wall Street was catching up with what Asia was doing Monday-day, it was not that surprising. It does, however, highlight that rallies are not all a one-way street.
Thank you to all those who attended the FNArena presentation in Sydney last night. A DVD of the presentation, entitled “Which Way Forward?”, is now in the editing process and will be available for purchase within the next month. Stay tuned.
