Daily Market Reports | Oct 01 2009
By Greg Peel
The Dow closed down 29 points or 0.3% while the S&P lost 0.3% to 1057 and the Nasdaq lost 0.1%.
Wall Street was quite simply all over the shop last night, which is not unusual for the last day of a quarter. When the dust settled, the broad market S&P 500 marked a 14.9% rise for the quarter – the best quarterly rise since December 1998. In that year the dotcom bubble was just starting to build.
At 9.45am, fifteen minutes into the session, the Dow was up 17 points. At 10am it was down 134 points. Ahead of the open, Wall Street learned that the June quarter US GDP result was not as bad as first thought, with the Commerce Department revising its previous estimate of negative 1.0% growth to negative 0.7% growth. But that was where the fun was to end.
Fifteen minutes after the bell, the Chicago purchasing managers’ index was released – a measure of economic activity in America’s Midwest heartland. This is a 50-neutral index, so when the index hit 50.0 on the mark in August, having climbed from earlier depths, Wall Street was confident this was another sign of a slowly improving economy. To that end, economists were expecting a reading of 52.0 for September.
Thus when it came in at 46.1 it was a shock, and enough of a shock to see the Dow drop 151 points in fifteen minutes. The Chicago PMI has now matched both industrial production and durable goods orders as showing recent dips into weakness following some months of improvement. To add fuel to the fire, the ADP private sector jobs number for September came in at a loss of 254,000 when economists had expected a loss of 210,000.
The official number will be released on Friday, which includes public sector jobs, although the rule of thumb is that the public sector usually adds 10,000 to the mix. Economists are expecting a low 167,000 jobs to be lost on the official measure for an unemployment rate of 9.9%, so a worse than expected ADP number does not bode well. Still – comparison is often unreliable, and the good news is the figure of 254,000 jobs lost was the lowest since July 2008.
Aside from sending Wall Street plunging, the data also caused the US dollar to rally, such is the counterintuitive dollar world we currently live in. Poor economic data should be weak for a currency, but in the case of the reserve currency it’s bullish as a safe haven in a post GFC world. But at 134 Dow points down, Wall Street hit a trampoline. Just after 1pm the Dow was up 34 points.
One could offer three explanations for this bounce. Firstly, Wall Street remains in “buy the dips” mode. Secondly, window dressing was required for the last day of the quarter, and a suddenly weak market could not be tolerated. But thirdly, and most importantly, the US dollar turned around and headed south again.
The dollar’s bounce on the economic data was only brief, as attention returned to the Japanese industrial production number which had been released overnight in Wall Street terms. It rose a higher than expected 1.8% in August, whereas US August IP fell. Then news came in from across the pond that the European Central Bank noted demand from European banks was particularly low for the latest allocation of its 1% fixed, one-year emergency loans. With no bond to buy to mimic US-style quantitative easing, the 1% bank loans have been the ECB’s major form of “extraordinary measures” as a response to the GFC, along with a 1% cash rate.
The lack of demand signals to the market that European banks, and thus the European economy, are on the improve. To top things off, the latest measure of European consumer confidence was released last night, and after three months of going nowhere it suddenly jumped significantly. Tuesday’s equivalent US measure was weak.
So what does one do with all this information? One buys the yen and euro and sells the US dollar. The dollar index ended down 0.5% to 76.72. But as soon as the dollar starts to slide, the stock market does the reverse. Hence the Dow hit its highs at lunchtime.
And when the dollar slides, commodity prices rally. And commodity prices are also subject to pressure from commodity funds window-dressing for the end of the quarter.
After opening weaker, it became a mad scramble for metals in London to the close (which is at 2pm New York). The combination of a weaker dollar, window-dressing, and short-covering by the Chinese ahead of the extended 60th anniversary holiday beginning today local time, sent lead up 1%, aluminium and tin up 2%, copper and zinc up 3% and nickel up 5%.
More madness was saved for oil. It was weekly inventory announcement day, and on this day last week I had the following to say in my Overnight Report:
“Why oil traders run screaming from one side of a listing ship to the other every week when the weekly US inventory numbers are released is anyone’s guess, but last night it was announced crude inventories had jumped when analysts had expected a fall. Oil duly plunged 4% or US$2.79 to US$68.57/bbl, once again showing just how trigger-happy the market is currently. A stronger US dollar didn’t help. Of course, this time last week it was all the other way around, and probably will be again next week. If you want an accurate prediction of weekly inventory movements it would seem the best thing to do would be to take the analyst consensus figure and reverse the sign.”
And waddya know? Analysts were expecting US gasoline inventories to rise by 1.2m barrels last week, but instead they fell by 1.6m. The price of crude shot up 5.8% or US$3.90 to US$70.61/bbl. If it were me in charge I’d be (a) sacking the oil analysts and (b) handing out seasick pills to the Nymex traders. But a close over US$70/bbl would have looked good for commodity funds at quarter-end, which typically have a heavy weighting in energy.
And gold joined in the bonanza, jumping US$15.40 to US$1007.10/oz after having lolled about below the magic number for a few days now.
The Aussie dollar liked all of the above, but realistically the better-than-a-cent jump in the Aussie to US$0.8829 over 24 hours was mostly driven by yesterday’s astonishing retail sales number, which had economists scrambling to readjust to a possible RBA rate rise as early as next week. Lord knows Glenn Stevens has laid down the ground work and dropped enough hints.
The 15% rise in the S&P 500 for the quarter was led by a 25% rise in the financial sector and a 21% rise in the materials sector. The feature of the September quarter for materials (commodities) was a collapsing Baltic Dry Freight Index – a leading indicator of commodities prices – and rapidly decreasing Chinese copper imports. But both gave way to a weaker US dollar, which sent commodity funds scrambling to reweight and sent commodity prices, and the S&P materials sector, soaring on thin air.
The financial sector might be up 25% on an improving US economy, and particularly on signs of house price stabilisation, but there was also a bit of a reality check last night when June quarter mortgage data were released (data that is at least three months old, but the most recent nevertheless).
The data showed that despite an improving economy, despite indications of house price increases, despite historically low mortgage rates driven by Fed emergency buying, and despite a program of modifying mortgage rates for distressed homeowners, the foreclosure rate jumped 17% from the first quarter to the second and fresh delinquencies rose 10%. Of those homeowners who were delinquent last year and had their mortgages modified, 50% are now delinquent again. And despite September registering the lowest mortgage rate in four months (4.94%), supported by the Fed program, mortgage applications dropped 2.8% in the month.
This is the US housing recovery. Take away the government’s tax incentives for first-home buyers, and where would we be? That program is due to end this year. What the US is currently experiencing, however, is the peak of resets for reset mortgages signed in 2007 or before. Reset mortgages offered an interest honeymoon before a big jump in rate down the track, and the peak of down the track is now. Clearly government and Fed support measures are not winning.
To complete the Wall Street story for the session, afternoon selling had a go at knocking the indices down once more but the buyers proved resilient, and hence a close of down 29 in the Dow.
The SPI Overnight fell 8 points or 0.2%, possibly belying big jumps in metals, gold and oil, but then it is October today. Be afraid.
Having said that, the ASX 200 seems to like the look of 4800. And maybe even 5000.
