Daily Market Reports | Sep 02 2009
By Greg Peel
The Dow fell 185 points or 2.0% while the S&P lost 2.2% to 998 and the Nasdaq fell 2.0%.
Was it just all the talk of September being historically the worst month for US stocks? Was it ongoing talk that a stock market which has run 50% simply must have a pull-back? Was it nervousness derived from recent positive data failing to have any further upward impact on indices? Was it just a pop in the recent short-covering financial sector bubble? Or was it all of the above?
Wall Street did manage to open higher last night, and in fact the Dow initially marked a 61 point rise on the back of the release of manufacturing and housing data. It was a big 24 hours for manufacturing indices. Australia, China, the EU, UK and US all reported August performance of manufacturing index data over the period. And for the most part, the news was good. Bear in mind that a number below 50 implies contraction and a number above 50 implies expansion.
Australia’s AiG PMI rose from 44.5 in July to 51.7 in August. That’s the first reading over 50 for 15 months. China’s CLSA (HSBC) PMI rose from 53.3 to 54.0 to mark the sixth month of readings above 50. The European Union PMI rose from 46.3 to 48.2 – still in contraction but heading in the right direction.
The UK spoilt the party. The CIPS PMI fell from 50.2 in July to 49.7 in August to suggest a recovery that had become apparent over the last few months was not being emphatically sustained. Among major economies, the UK remains the basket case, although uncertainty now reigns in Japan where the first new government in fifty years has been received with trepidation by foreign financial markets.
In the US, the ISM PMI rose from 48.9 to 52.9 to mark the first reading over 50 in 19 months.
That was enough to start Wall Street off on a bright note, and pending home sales data provided further impetus. July pending home sales rose 3.2% over June and 12% over last July. The jump marked the sixth consecutive month of gains, and that has never happened in the eight-year history of the index. At 97.6 the pending home sales index is now back at 2007 levels.
It should have been a solid base for a fresh assault. But realistically, such data are now only showing a consistent trend rather than providing surprise. Wall Street has absorbed a raft of such positive data over the last week or so, and failed to rally with any conviction. The implication is that after 50%, numbers such as last night’s were already assumed. There was nowhere else to go.
And so in came the sellers. The Dow dropped precipitously for an hour before levelling out into a less steep downward path. Fifteen minutes before the bell the Dow was down 204 before a late buying skirmish, but that basically failed as well. Volume was above average.
Leading the downward charge were the very financial stocks which have posted astronomical gains over the last month, mostly on short-covering. AIG shares more than tripled in August, but last night they closed down 20%. A downgrade to Underperform from one analyst helped (he suggested AIG was worth US$10 rather than the US$50 it has hit recently) but realistically AIG and friends – Fannie Mae, Freddie Mac and Citigroup – had formed an interim bubble just waiting to burst. Fannie and Freddie fell 17% last night, and Citi 9%. This sparked a sympathy sell-off across the sector, with Bank of America, for example, down 6%.
As the stock market tumbled, the US dollar rallied as the money rushed back in. The US dollar index jumped 0.8% to 78.74 and sparked an inevitable sell-off in commodities, which in turn sent commodity stocks lower.
The London Metals Exchange had already missed one day of weakness due to the UK public holiday on Monday. On a catch-up, lead fell 1%, aluminium, tin and zinc fell around 2%, copper fell 5% and nickel fell 6%. In New York, oil fell 3% or US$1.91 to US$68.05/bbl.
Gold ignored the US dollar and became a safe haven once again – against a potential stock market pull-back – and rose US$5.10 to US$956.20/oz. The Aussie was hammered nevertheless, falling nearly two cents to US$0.8257.
There was also mixed news on the US stock market with regard to monthly auto sales. Economists expected very healthy sales numbers, given the runaway success of the expanded “cash for clunkers” program. And so it was that Ford posted a 17% increase in sales in August.
But there were two problems. Firstly, as Ford is the only automaker of the US Big Three not to be presently propped up by the government, Americans have clearly taken the supposedly safer option by trading in their clunkers for a Lincoln or a Mercury, and shying away from a Chevrolet or Dodge. General Motors’ sales fell 20% in August while Chrysler’s fell 15%. The second problem was that economists actually expected Ford’s sales increase to be much better than 17%. This does not bode well for sales over the next few months now that “clunkers” is history. Ford shares fell 5% last night.
So September has started with a bang of the not too welcome kind. Is this the start of a 10% correction, or just a blip? Given constant commentary pointing to the vast amount of cash still on the sidelines – cash that missed the rally from March – one could not be particularly surprised if last night was the pull-back. But one point about September is that it is a month of corporate vacuum – it straddles the end of the June quarter reporting season and the beginning of the September quarter reporting season in October. Strong earnings in June were supported only by cost-cutting and not revenue growth. If costs have now been cut, can the September results show revenue improvement? If not, then October may once again turn ugly.
The SPI Overnight dropped 71 points or 1.6%.
Watch out today for Australia’s first read on the second quarter GDP number.
