Daily Market Reports | Sep 10 2009
By Greg Peel
The Dow closed up 49 points or 0.5% while the S&P gained 0.8% to 1033 and the Nasdaq jumped 1.1%.
Grind, grind, grind. Wall Street continues to work its way higher, tenaciously overcoming the headwind of at least half a market looking for a near term correction. The going has been tough over the last four days, and last night the S&P 500 managed to close at 1033 – still one point shy of its previous high.
The Dow managed to graft its way up 80 points in the morning, driven on by nothing in particular, before plateauing over lunch. Then at 2.15pm – the allotted time for Fed announcements – it lost its bottle.
The Fed Beige Book is a largely anecdotal survey of the twelve Fed regions and the level of economic activity therein. The good news from the September survey is that eleven of the twelve regions now suggest activity is either “stabilising”, “stable” or “firming”. The St Louis region, on the other hand, was seeing signs of moderation in the pace of its contraction.
This seems good news, or is it? It might be good on a right here, right now basis, but the stock market is a forward indicator and it has already priced in at least “stability” if not “growth”. Thus this survey is more of a confirmation rather than an incentive, and not a strong confirmation at that. To make matters worse, the Fed noted that improvements in consumer spending across the regions were solely a result of the success of the “cash for clunkers” program. Take that away, and the spending America so desperately needs to get its economy back on track is not yet apparent. Rising unemployment is the major villain.
Clearly Australia is suffering a similar fate, albeit Australia’s export economy is not nearly as reliant as the US economy on domestic spending. Only a couple of months ago Australian economists were warning that strong retail sales figures were purely a result of government hand-outs, and warned that sales figures beyond June would likely fall into a vacuum once those hand-outs had run their course. But as other economic indicators and confidence measures continued to look very positive in the interim, economists became a bit giddy with excitement, tossing their original forecasts away and instead expecting a 0.5% rise in July sales.
The actual result of negative 1.0% thus came as a shock – enough to wipe out yesterday’s earlier rally on the ASX – but realistically it is only consistent with previous economist forecasts before they all got a bit carried away. The housing finance stats were better – they may have been negative but economists are also expecting the effect of government grants to wane before the grants are downgraded at the end of this month. The effect has not waned too much just yet, but unless the program is extended one assumes later stats will be more negative.
Yesterday’s numbers may well have put paid to any thoughts of a rate rise as early as October, although as the first Tuesday in October is one week into the month there will be another round of monthly numbers for the RBA to absorb before making a decision.
But back to Wall Street.
The Beige Book was not well received, and at 3pm the Dow was almost back to square for the day. Only a typical late buying push saw the indices close higher, but it was notable that the S&P could not hold above its previous high.
The early advance on Wall Street was enough to tip the US dollar over further, marking a new one-year low of 76.80 on the index at the stock market peak. But as the stock market wobbled the dollar recovered, albeit to still finish 0.3% lower at 77.03 over 24 hours.
The recovery in the dollar was enough to pull the reins on commodity markets. Oil had pushed up to US$72.52/bbl but corrected to be only up US21c at US$71.31/bbl by the close. Any time this morning our time, OPEC is expected to announce its new production levels, which are expected to be unchanged.
Over in London nevertheless, the early drop in the dollar proved not enough to engender too much excitement anyway. After two sessions of solid gains, base metal prices remained sluggish from the start with traders suggesting there was little incentive to push any higher. With the dollar’s later recovery, all metals finished 0-1% lower.
And then there’s gold.
On Monday our time the Asian markets pushed gold over US$1000/oz. Europe kept it there, and the US initially pushed it higher, only to trigger a big wave of selling. Undeterred, Asia again pushed gold over US$1000 yesterday, before this time the selling came out of London to begin with, only to see another late push and another four-digit read. Gold then bounced around in New York above the magic level, before being slammed the moment London shut up shop for the day. Despite a weaker greenback, gold finished down US$3.60 to US$990.90/oz over 24 hours.
Now if this were some time between, say, 1997 and 2007, the unspoken explanation for major resistance at a psychological number would be covert selling of gold by the US Treasury. It is now generally accepted, thanks to the tireless efforts of gold activist group GATA, that for years the US government had been using covert gold sales – under the radar of the keeper of the world’s central bank gold register, the IMF – to prop up an otherwise fragile US dollar. The Treasury would “lend” gold bullion, without telling the IMF, to the so-called “bullion banks” (Goldman Sachs is one for example) who would then madly sell Comex futures contracts and break the back of any gold price rally.
This activity seemed to end around late 2007, which is one explanation as to why gold shot from US$700 to US$1000 in a blink. One presumes that while the US Treasury was busy dealing with a growing credit crisis, and the Fed was cutting its cash rate, there was not much point in also trying to sell gold. In 2008, the gold price dropped after the fall of Lehman, which turned a US crisis into a global crisis and sent the US dollar rallying.
We now have a new administration, but like his predecessor Hank Paulson, Obama’s Treasurer Timothy Geithner is ex-Goldman. This might raise suspicions, but realistically Geithner’s efforts on maintaining his predecessors’ “strong dollar” mantra have come across as hollow. In truth the Obama Administration seems happier to allow the US dollar to depreciate in order to help contain the massive US deficits (a weaker dollar means more exports and less imports for the US).
So if it’s not the Treasury slamming the dollar above US$1000, who is it? Well in 2008, when gold fell below US$800/oz, there was an enormous drive to buy gold bullion across the globe, including at a retail level. This was the Armageddon protection trade. So strong was demand for gold coins, for example, global mints could not keep up. But now that Armageddon seems to have been averted, and the magic US$1000 level has been breached once more, there is much incentive to take profits.
Thus the heavy resistance gold is experiencing at present is most likely simple profit-taking.
The Aussie managed not to trouble the scorers much over 24 hours, ending at US$0.8620.
The SPI Overnight, ever confident, added 31 points or 0.8%, suggesting more 2009 blue sky from the open.
