The Overnight Report: Just Not Buying It

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By Andrew Nelson

The Dow dropped 77 points, or 0.8%, the S&P 500 skidded 0.85%, just barely staying above 1,000 mark and the Nasdaq did even worse, losing 1.2%.

Stocks started the day on a downward tack, pulling back from the previous session’s 2009 highs. Then at 10:00 New York time the bottom fell out. The latest read of Reuters/University of Michigan index of consumer sentiment hit the stands and it showed a drop to 63.2 in August from 66 in July. The market was hoping to see a rise in the index to 68.5. The result: the end of the four-week winning streak.

Within a few minutes of the news, each of the major indices sliced off another percentage point. There’s no doubting the release was a definite disappointment, but the reaction was probably made worse given the weaker-than-expected retail sales report and a less-than-encouraging outlook from Wal-Mart yesterday. You can talk all you want about economic indicators, but when you’ve got an economy that is two thirds driven by consumer spending, just about everything else takes a back seat.

There could be no better evidence of this than the fact the preponderance of the day’s economic bulletins were broadly positive, and if anything, indicated a nearing end to the recession. Industrial production, which is the key measure of factory output, actually beat expectations with a rise of 0.5% in July after falling 0.4% in the previous month. This was the first rise in 9 months it rose and is an indicator that manufacturing weakness could be bottoming. Another good sign was an improvement in capacity utilization, which also beat expectation with a rise to 68.5% from 68.1% in June.

The street didn’t care, at least for most of the day, instead fixating on the consumer sentiment read and giving us a pullback that many were starting to believe was long overdue. Sure, the “serious investor” is normally little swayed by the sentiment read, instead focussing more on actual consumer spending. But after all and sundry have bought in to the rally over the last month, few could afford to ignore the signal, making it a good day to take some profits.

However, the Dow did manage to pull back 50 points in the last half hour. So, while volumes were light and in no way indicate any sort of furious early selling or late buying, the run to the bell showed that many may now believing a floor is forming.

Big name retailer J.C. Penney couldn’t have picked a worse day this week to announce its second quarter results. Stocks fell more than 6% after the department-store operator reported it had booked a US$1m loss and said it only expects a break-even result in the current quarter. Rival Nordstrom fared little better despite hitting on its earnings target and raising forecasts for the year. The problem: same-store sales dropped 12.3% with the high-end department store.

Boeing was the biggest drag on the Dow after the aerospace company said an Italian supplier had ceased production on two sections of the company’s chronically delayed 787 Dreamliner plane because of structural flaws. All up, 24 of the Dow’s 30 components fell.

Concerns about the health of the American consumer were felt in most other markets as well, but especially weighed on commodities prices. This did serve to send some investors scuttling back into the safe haven of government debt, which saw Treasury prices rally. The yield on the benchmark 10-year note dropped to 3.54% from 3.6% Thursday

The dollar turned higher against the euro, clawing back ground as stocks fell out of favour. The Aussie was also weaker against the greenback, but the yen was a little stronger. Still, the dollar index, which measure the USD against a basket of six major currencies, rose 0.4%. It was this mix of a stronger dollar and a weaker consumer outlook and a flight to bonds that saw oil futures tumble more than 4% to end below US$68 a barrel, a three-week low. The official read was: Light sweet crude for September delivery down US$3.01, or 4.3%, to end at US$67.51 a barrel. Earlier in the day, the contract hit an intraday low of US$67.12.

Base metals also continued with their recent retracement and the later the day became in London, the worse the selling.  A stronger US dollar, falling equities markets in the US and Europe and economic news that casts doubt on the US recovery story was never going to be a good mix for the complex. And much like the day’s pullback in US equities, the weakness in base metals has been seen by many as a long time in coming and a bout of profit taking almost inevitable.

The SPI Overnight took a good look at a retreating Wall Street and falling base metals prices and went just the way you would think, down. But the decline was moderate, down 28 points at 4397.

Australian reporting seasons heats up on Monday, with Newcrest ((NCM)), Ansell ((ANN)), Challenger ((CGF)) and BlueScope ((BSL)) all putting out their full year results. For the full list of reporting dates and major economic data releases plase refer to the FNArena calendar.

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