Daily Market Reports | Sep 11 2009
 By Greg Peel
The Dow closed up 80 points or 0.8% while the S&P added 1.0% to 1044 and the Nasdaq gained 1.1%.
The broad market index pushed through its previous rally-high of 1034 without drama last night, to set a new high for 2009 and the highest level in eleven months. It was one-way traffic this time as Wall Street opened lower for half an hour but then set itself on a steady upward trajectory, closing at its high. This marks the fifth straight day of gains, and gives further weight to the adage that if everyone expects the same thing to happen (eg a pull-back) then the opposite will occur. We will only see a significant correction in this market the day everyone decides there won’t be one after all.
There are three types of investors in this market at present: those adding to long positions on a fundamentally positive view; those who went short ahead of an expected pull-back in September and now have to cover; and those who have missed the rally from March and have been waiting vainly for a pull-back to occur for an entry point. The latter group has clearly become desperate, as evidenced last night by every sector within the S&P 500 finishing higher, including Materials. More on that in a moment.
The impetus for the 1% rise was the humble weekly jobs data. The number of new weekly jobless claims has been characteristically fluctuating recently and this week it fell 26,000 to 550,000 when economists had expected 560,000. Moreover, the continuing claims number fell to 6.02m; its lowest level since April. This figure has been up and down a few times in the last few weeks. A fall in continuing claims is meant to signal the recession has ended, but as yet there is no clear trend.
Wall Street was also heartened by an announcement from consumer staple giant and Dow component Proctor & Gamble that it expected sales to begin improving in the next few months. Proctor’s shares jumped 4% on this news, despite the company suggesting it would increase sales by cutting prices. Wall Street in general also paid little heed to agricultural giant Monsanto, which updated guidance to suggest 2009 earnings would come in at the low end of the range, and that the company would have to cut more jobs than first anticipated. Monsanto shares nevertheless fell 5%.
The rise in the S&P Materials sector came about despite a very bad night on the London Metals Exchange. Before the opening bell on Wall Street, the US dollar was trading higher in the European session, aided to some extent by the Bank of England deciding to leave its cash rate on hold at 0.5% (although this was expected). The stronger greenback provided initial impetus for traders to take profits on what has been a surging metals market of late, but pretty soon the trickle turned into a flood.
The star performing metal to the upside recently has been lead (up 40% in less than a month). Driving the lead price have been constant reports out of China that a great deal of the country’s lead smelting operations had been, or would be, forced to shut down by the government due to pollution concerns. It was decided that 400ktpa of production had already been shut down and another 500ktpa of production was being targeted. This, in theory, would leave a big hole in global lead supply.
But last night a report came out from state-backed Chinese research firm Antaike, Basemetals.com reports, suggesting actual loss of lead production would be only 60,000t in 2009, leaving a surplus production of 270,000t. Everything coming out of China has to be taken with a grain of salt, of course, but this news was enough to send shivers of doubt through the LME. There has been no fundamental buying of base metals from actual consumers of late – only commodity fund buying on the back of a weaker US dollar and stronger global economic data. And last night, those funds turned tail.
Lead closed the late session down 13%. This dragged down the whole complex as funds came to terms with just how far they’d pushed in recent sessions. Aluminium, nickel, tin and zinc all fell 2-4%, while copper managed to only fall just over 1%. Closing prices actually represented a pull-back from the lows of the session, given the US dollar once again fell in the New York session when the stock market began to rally.
The US dollar actually fell a net 0.3% on its index over 24 hours, to 76.81, thus creating a fresh one-year low. Assisting the dollar’s fall was the latest US trade data.
I suggested yesterday that despite maintaining the hackneyed “strong dollar” mantra the Obama Administration is likely welcoming a fall in the US dollar index, given this has the effect of making US exports more attractive and reduces US consumer demand for imports. This in turn should lead to positive monthly trade balances, and hence a reduction of the current account deficit. Such a reduction then acts as at least some offset to the ever growing fiscal deficit. But last night it revealed that the trade deficit blew out 16.3% in July to mark the biggest trade gap since January. Clearly something is not working.
The blow-out, however, is largely a reflection of the runaway success of the government’s “cash for clunkers” program. Not only were Americans trading in their old bombs for new Fords, they were clearly buying Toyotas and Volkswagens as well. Thus one should expect the August trade balance to look a little different. In a typical case of positive spin, economists were suggesting the July trade balance was great news given it indicated Americans were ready to spend again. Never mind that the government has to borrow from the world to pay the cash hand-outs.
Yet once again, the rest of the world chimed in by buying US Treasury debt. Last night’s auction of thirty-year (mortgage rate benchmark) bonds was as strongly supported as auctions of the tens and threes have been over the previous two days. Indeed, demand was at its greatest level since November 2007. With a cash rate on hold near zero, and monetary inflation looming as a threat, such auction success continues to astonish. What is notable is the level of foreign central bank and sovereign wealth fund buying. Such percentages have fallen into the 40-50% range this month following levels of 60-70% in previous monthly auctions. It would seem the creditor nations might be quietly backing away, leaving US domestic investors to take up the slack. We continue to hear of “cash on the sidelines” that still needs to go into the stock market. But it is clear there is still plenty of cash available for the debt market, perhaps in lieu.
Oil ignored base metal activity last night and rose another US63c to US$71.94/bbl. Aside from a weaker greenback, the impetus was the weekly US inventory data released by the Energy Information Agency. It showed a big reduction in crude inventories.
As I have noted in this Report before, there are two reasons why crude inventories might fall. Either demand has increased to draw on stockpiles, or demand has decreased prompting less imports. Last night it was also announced by the EIA that inventories of petrol and diesel had increased due to “lack of demand”. The reason for a fall in crude inventories was thus a reduction in oil imports. There is little point in importing more crude and refining it into products when no one wants to buy those products. Yet Nymex saw this as a positive.
Gold was playing games again last night. It was sold heavily in Asia to around US$983/oz as the London session kicked in. But as New York opened to join London, the buying returned and gold marked a rise of US$6.10 to US$997.00/oz over 24 hours. The US dollar has done nothing but weaken since gold passed through US$1000/oz this week, but the monetary inflation buyers are meeting sellers reversing their safe haven plays, and who are making a profit in the process. US$1000 will be a tough nut to crack, and even tougher if, for some silly reason, momentum fades in the stock market (given the US dollar will rise).
It’s just as well Australia’s stock market is not affected by base metals prices. The SPI Overnight was up 42 points or 0.9%. The Aussie nevertheless managed only a small gain to US$0.8620 despite the weaker greenback.
There is a big wave of economic data coming out of China today, which will no doubt impact on our market. But it’s also Friday. Take some profits and go to lunch?
