Daily Market Reports | Sep 09 2009
By Greg Peel
The Dow closed up 56 points or 0.6% while the S&P gained 0.9% to 1025 and the Nasdaq also added 0.9%.
“It’s as volatile as hell,” an LME metals trader told Basemetals.com in London last night, “The funds have been tracking the Dow going up and down all day”.
Statements such as these force one to ask the question once again as to who is leading who in world financial markets at present. Last night Wall Street opened immediately at its highs, up 70 in Dow, was back to square half an hour later, back near the high another half an hour later, and then chopped around all day to finish up 56. Some NYSE traders were disappointed in the US markets, given European and Asian markets had posted strong gains while America enjoyed its Labor Day break.
So there was some catching up to do, but to put things into perspective, the S&P closed last night at 1025 – still shy of its previous 1030 high – while Australia’s ASX 200 created a new 2009 high yesterday at 4523, eclipsing the previous closing high of 4514.
Impetus for last night’s choppy trade began over the weekend as the G20 finance ministers announced they were solid to a man on maintaining their coordinated economic stimulus packages across the globe. This was not an announcement about fresh stimulus, just a relief to those who have worried that recent global economic strength may now illicit a global stimulus wind-down.
In Australia the federal opposition has argued (for the sake of an argument) that signs of economic strength suggest the government must wind back stimulus commitments lest it sparks an interest rate rise. It is true that RBA rhetoric suggests a rate rise very soon, but while the opposition will tell you Australia does not need stimulus if the economy is performing well, economists will tell you the economy is only performing well (June quarter GDP up 0.6%) because of government stimulus. Thus if you take the oxygen away from the patient, can he breathe on his own?
The effect of a re-commited G20 is to encourage an even greater appetite for risk across the globe than as has already been the case to date. Fearing a pull-back across markets this month, investors are now content there is a G20 “put option” in place – a safety net. Hence investors have seen fit to withdraw funds from safe US dollar deposit trades and invest further into stocks and commodities.
The weaker greenback ensures a mathematical rise in commodity prices, all things being equal, and rise in commodity prices ensures upward pressure on stock markets via materials (resources) sectors. But the irony is that the G20’s commitment means that the US in particular has no intention of winding back its globally dominant deficit, and that puts even more pressure on the US dollar from a monetary inflation stand point.
Yet last night the US Treasury’s auction of US$38bn of three-year notes was the most heavily subscribed this year. Foreign participation was only 54% – down from 68% last month – but it is clear short-end Treasury bonds are still in favour as risk protection against risk trades elsewhere. How does this all add up?
Impetus for a positive Wall Street also came via Monday’s announced takeover bid by US food giant and Dow component Kraft for UK-based Cadbury at a significant premium. Later it was announced that Deutsche Telekom and France Telecom intended to merge their British mobile phone operations. This is classic post-recession consolidation, but a positive sign that strength is indeed returning to the market as the wounded fall by the wayside. And thus yet more impetus for investors to take more risk.
Then last night it was announced that the world’s biggest exporter – Germany – had seen a 2.3% rise in exports in July with no change in imports, although industrial production numbers remained fragile. Again this was grist for the US dollar weakness mill, sending the euro to a new 2009 high against the greenback of US$1.45. And the UK announced a bigger than expected jump in July manufacturing, sending the pound higher as well.
So coming back to our opening statement by the LME trader, note that metals trading is still being dominated by commodity funds. Basemetals.com also commented “fundamentals such as demand levels have shown little improvement so far, with inventories still rising”. The commodity funds are chasing the Dow around while the Dow is chasing metals prices around. Who is leading who?
Metals prices were again solid in London last night after a positive session on Monday. All metals rose 1-4% leaving New York traders to catch up on two sessions of gains. But metal prices retreated from their highs late in the London session as technical selling emerged, which is probably one reason why Wall Street did not quite surge as much as NYSE traders had wanted.
Oil nevertheless surged on dollar weakness, and also on the expectation OPEC would not increase its production levels after its meeting in Vienna tonight. Oil jumped US$3.08 or 4.5% to US$71.10/bbl.
Gold was the star of the Asian and European sessions over the last 24 hours, but met stiff resistance in New York. Gold has been threatening to charge for US$1000/oz again lately, and with the dollar index now broken out of its recently tight 78-79 range, to 77.30, yesterday was a good day for the assault. Once through US$1000, technical buying pushed the metal straight up to US$1008 as the sun rose over Manhattan, but immediately the sellers poured in, sending gold unceremoniously back to US$994.50/oz – only US10c above Monday night’s mark.
It is clear that if gold is going to meaningfully break above US$1000, it is not going to do it without a fight. Of course US$1000 is just a number like any other number, but psychology still rules the day. Another irony of gold’s move is the metal is not only being bought on monetary inflation fears, but on financial market overblown fears. It is once again risk protection against the risk trade. Yet gold’s price movement is sending gold producer stocks soaring (as has been the case in Australia too) and thus stock indices forging higher.
And how about that Aussie? The little battler has added a good couple of cents since Friday, now looking bold once more at US$0.8617. While this is a clear reflection of Australia’s commodity currency status (and helped by yesterday’s business confidence figures), it will not be particularly good news for unhedged Aussie resource companies.
Bearing in mind that Wall Street was playing catch-up last night, the SPI Overnight added only 11 points or 0.2%.
There are some big numbers out today in Australia: housing finance, retail sales and Westpac’s consumer confidence survey.