Daily Market Reports | May 29 2009
By Greg Peel
The Dow closed up 103 points or 1.3% while the S&P rose 1.5% to 906 and the Nasdaq gained 1.2%.
It was a rock and roll morning session on the NYSE as the market opened stronger, then plummeted below the line, then rallied, then fell, then settled ahead of the post-lunch Treasury auction. The stock market has been keeping a weather eye on the bond market in recent weeks, but on Wednesday the stock market received quite a scare as the 10-year yield suddenly surged, meaning investors were abandoning long bonds.
Long-end selling is attributed to rising inflation fears given the extent of government printing and America’s growing debt. However US Treasuries have not been abandoned across the yield curve – the short-end is still highly sought after as a safe haven of the reserve currency, but the shorter the better when inflation is the big risk down the track. If 10-year yields get much higher nevertheless, bonds become more attractive an investment than stocks.
The 2-year auction on Tuesday was thus well oversubscribed and the 5-year was also well supported on Wednesday. But on a net basis, investors were selling the 10-years to buy the shorter bonds. Last night it was the turn of the 7-years. What is seven, short or long? It’s a bit of a limbo maturity. But it is sufficiently long enough that the stock market feared a poorly supported auction could possibly tip the long end right over the edge.
Ahead of the auction there were plenty of economic data to consume. On a net basis it was all good, but whenever the market rallied the sellers came in to set up ahead of a potentially bad 7-year result.
In March, new orders for durable goods (big ticket capital items rather than small ticket consumables) fell 2.1% to continue a contracting trend. Economists were expecting some green shoots in April however, and were looking for a rise in orders of 0.6%. What they got was a rise of 1.9%. The bulk of the gain came from orders for primary metals, machinery and – believe it or not – motor vehicles. What made the net number even more impressive was a 6.8% fall in aeroplane orders.
A month ago this result would have sent Wall Street to the moon.
After Wednesday’s rise in existing home sales result, Wall Street was hoping for more of the same in the April new home sales figures last night. Sales did indeed rise 0.3%, but that was considered as good as unchanged. Nevertheless, unchanged is still better than down. Prices were down 15% on a year earlier, but we sort of knew that.
The weekly new jobless claims number fell 13,000 to 633,000, which again is better than a rise. Continuing claims continue to climb and set new records every week however.
Another volatile set of weekly numbers are the US crude and gasoline inventories, as released last night. The market expected crude inventories to rise (they are already at record levels) but instead they fell. Gasoline inventories also fell. These are good results but recent similar results were attributed to refiners both reducing crude exports and reducing gasoline production due to weak demand, which makes the good figures not quite so good. This week, refiners again reduced their crude imports but the good news is they increased their gasoline production ahead of the Memorial Day summer kick-off. Production was higher but inventories fell – this can only mean demand rose. Woohoo!
And woohoo it was. Oil jumped yet another US$1.32 to US$65.08/bbl.
While all of this was good news, the Dow remained on the flatline at 1pm ahead of the 7-year bond auction. There was US$26bn worth on offer, and Wall Street held its breath.
It was oversubscribed. Cowboys who had set themselves short stocks ahead of the auction had to scramble to cover, and the Dow shot up 100 points. A similar response met the 10-year bond market. The 10-years had climbed five days in a row, including Wednesday’s surge to 3.72%, but they dropped sharply after last night’s auction before settling at 3.6%.
While Wall Street may have breathed a temporary sigh of relief, one successful 7-year auction is not a clear sign there’s absolutely nothing to worry about on the printing-debt-inflation front. Both the stock and bond markets saw short-covering rallies last night and little more. The US dollar edged slightly higher as a result (80.5 on the index) yet gold rallied US$10.60 to US$960.10/oz as investors again sought the inflation hedge.
Silver rallied US39c or 2.6% to US$15.15/oz – its first close over US$15 in nine months. Many inflation traders see silver as a more attractive investment option to gold, given it actually does have industrial use as well and is undervalued compared to gold on an historical basis.
Base metal trading was open in London when the durable goods and other positive data were released, but closed by the time of the bond auction. The metals all had a positive session, with copper up 1.5% and lead and nickel winning with 3% gains.
The Aussie likes commodity price rises more than it fears a slightly stronger greenback, but it also likes the yen to be sold against the greenback, as it was last night. The Aussie spun around and took back the 0.8 cent loss in the previous session to be US$0.7851.
The SPI Overnight was up 31 points or 0.8%.
Tonight the US will learn first quarter GDP.
