The Overnight Report: Stocks in Bondage

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

By Greg Peel

The Dow closed 1 point higher while the S&P lost less than a point. The Nasdaq closed 0.4% lower as Apple halved the price of its old iPhone ahead of introducing two new models.

The unchanged close in the markets belied the fact they were down all day on very light summer volume until a 3pm buying spurt spat and then fizzed. The Dow was down 130 points at its nadir and up 55 just before the close. 2008 was all about the three o’clock wave of selling – mostly fund redemptions – while the 2009 three o’clock wave is very much to the buy side as funds look to catch up on stocks providing lower buying prices during the session.

Despite this support on any weakness, the indices are currently failing to make any headway. One might have thought that a jobs result of 345,000 to an expectation of 525,000 losses could have produced a better result than up 15 points in the Dow over two sessions. There are two reasons why not.

Firstly, the market has rallied 35% on green shoots and now it’s time for the US economy to deliver. The jobs number was a shock, but actual unemployment rose as a percentage. Last week saw large US retailers posting same store sales results for the month and most of these were down. Last night America’s leading purveyor of staple foods – McDonalds – also posted a surprising drop in sales. The market now needs to see results that are not only less bad, but good. As to whether that will happen as early as the June quarter results is questionable. The current PE ratio on 2009 forecast earnings on the S&P 500 is 17x. The historical average is 15x. The P is looking optimistic.

Secondly, and most importantly right now, the stock markets are being spooked by the bond markets. It was considered that 3.75% in the 10-year was a critical yield level given it is roughly the current dividend yield on the S&P 500. Above that level, bonds become a higher paying yet more creditworthy investment. On Friday the 10-year hit 3.8%. Last night bond prices initially rallied (yields fell) as the US contemplated the fate of a collapsing UK government and Ireland saw its credit rating downgraded, but it was not to last. The 10-year yield is now at 3.9%.

The 2-year bond was at 1.0% only a week ago and it is now over 1.4%. This reflects movement out of the safe haven and into other markets, which at present seem to be commodities markets more so than stocks. It is the materials sector mostly holding the indices up right now. Yet the US dollar is not crashing just yet as one might expect – it crept up to 80.9 on the index last night – implying the “reflation” trade is being driven not simply by a weaker dollar, but by a genuine belief in emerging market demand recovery. Either will cause inflation.

Hence oil rose another US21c last night to US$68.65/bbl. London metals mostly ticked lower, except for new star of the moment, aluminium, which added 3%.

After a big fall on Friday night, gold slipped another US$1.30 to US$952.10/oz. The Aussie fell over half a cent to US$0.7894.

The SPI Overnight was down 18 points. The ups and downs of our two global resource protagonists – BHP Billiton ((BHP)) and Rio Tinto ((RIO)) – saw another down last night, with both falling 2-4% on either side of the Atlantic.

Click to view our Glossary of Financial Terms