Daily Market Reports | Oct 06 2009
By Greg Peel
The Dow closed up 112 points or 1.2% while the S&P added 1.5% to 1040 and the Nasdaq managed 1.0%.
Last week on Wall Street was the weakest since July – the last time the market thought it was entering a pull-back period. Once again it looked like stocks might be finally taking a breather after a sterling run, but as I suggested in this report last Friday, “courageous is he who calls the pull-back”. We are still in a situation in which just about everyone, including the bulls, is expecting a pull-back and this means the chances are unlikely. A pull-back will occur when most give up on the idea, or if there is some exogenous shock.
I’m still tipping that the US third quarter reporting season, due to begin in a couple of weeks, will disappoint on the revenue line against over-excited analyst forecasts. Recent economic data have not been as positive as earlier data. But then I could be wrong. However, this might provide a pull-back trigger.
But having noted that recent economic data (industrial production, durable goods, consumer confidence, Chicago activity, manufacturing index, employment) have disappointed, last night the opposite was true.
Last week the Institute of Supply Management performance of manufacturing index was released in the US, and it slipped down a notch after a few months of improvement, contrary to economist consensus. It was still a number over 50 nevertheless (just), signifying expansion. But in this day and age the once great US manufacturing industry is a mere shadow of its former self, representing only 20% of economic output. The services industries, which include finance, insurance, IT, internet services etc, now represent 80% of US output. It is thus the ISM non-manufacturing index which packs the bigger punch.
This was released last night, and economists were expecting the figure to reach 50 for the first time post-GFC – the neutral level – from 48.4 in August. Instead it jumped to 50.9 for September. This was one influential driver of last night’s turnaround rally.
The other driver was a report from Goldman Sachs bank analysts upgrading their recommendations on the large-cap US banks. Goldmans now sees the big bank sector as “attractive” as the established franchises with much improved balance sheets stand to outperform the smaller and regional banking sector. Goldmans already had JP Morgan and Bank of America on its “Conviction Buy” list, but last night added Capital One and raised Wells Fargo from Neutral to Buy.
(The implication on Wells Fargo is thus “Buy Without Conviction”. I’ve always found this a strange system.)
This was enough to spin around the financial sector, which had been leading the S&P 500 down over the last week having been one of the major drivers of the rally to previous highs. There was no doubt a bit of a short-covering scramble as usual.
The other driver last night was once again our dichotomy of weak US dollar-strong stock market. Or is that strong stock market-weak US dollar? Or do both chase each other’s tail?
After the previous weekend’s G20 meeting in Pittsburgh, at which leaders bowed down in dutiful respect to world leader Kevin Rudd, this weekend saw a meeting of the G7 finance ministers in Istanbul. The G7 comprises the US, UK, Germany, France, Italy, Japan and Canada, and has been considered the group of leading economies since 1976 when Canada joined the G6. In recent times, G7 meetings have tended to be G8 meetings, with China invited, but this one wasn’t. Mind you, China is a bit preoccupied at present.
The G7 meeting provided the opportunity to talk a bit more about the global economic recovery, imbalance, and currency issues, without those pesky other 13 pretenders. Currency markets were expecting some sort of statement which they assumed would be collectively supportive of the US dollar. The dollar was mostly stronger last week. But I noted in this report prior to the G20 that leaders and finance ministers are careful not to make statements that show their hand, for risk of causing sudden volatility in the very currency markets they’re trying to control. And so it was that there was no “strong dollar” comment out of Istanbul, only the standard party line of “acting to prevent volatility”.
The failure to show overt support for the greenback was enough to affect its demise once more, and the strong ISM services number was an added fillip to switch back out of safe haven and into risk. The dollar index thus dropped 0.5% to 76.67. The one-year low remains at close to 76.00, with the all-time low achieved pre-Lehman close to 72.00.
The Aussie had already surged in thin half-holiday trading yesterday, spurred on by a positive ANZ job ads number and a positive read for Australia’s equivalent services sector index. (The services sector does not pack the same punch in Australia as in the US, nevertheless, given our resources bent.) The fall in the greenback last night added to Aussie strength, sending it up 1.3 cents from Friday to US$0.8775. Two fat ladies are on the horizon.
Gold was similarly inspired, rising another US$15.50 to US$1017.20/oz. Adding to gold’s strength was the announcement from the biggest gold ETF – the SPDR Gold Trust – that Friday’s trade saw 1.22t added to a total long position of 1097t. If this was inspirational, it means gold is being bought because gold is being bought, and that’s dangerous.
Traders in London were nevertheless reluctant to come out and play last night, and this will likely be the case all week. With China having an extended party, the LME is loathe to become too excited either way. Subsequently metals bounced around in their recent ranges last night, with copper rising 1.8% to be smack on its US$6000/t psychological level, while the others were mixed.
The weak dollar and positive ISM reading were also positive for oil, but not convincingly so. Oil rose US46c to US$70.41/bbl.
It’s a busy week in the US bond market this week, with a total of US$126bn of Treasury bills, notes and bonds being offered to the world to help America maintain the lifestyle to which it is accustomed. Last night’s auction featured US$7bn of ten-year Treasury Inflation Protected Securities (TIPS), which was very well patronised both domestically and by foreign central banks. This is no surprise given the inflation-protection element of the securities – something the billions in bonds coming up this week don’t offer. Monetary inflation is the US bond buyer’s greatest fear.
The standard ten-year bond rate is currently 3.22%, which is quite remarkable given it had reached 4.0% a couple of months ago and since then the Treasury has done nothing but sell more bonds by the truck-load and the stock market has had a second leg of its rally.
After a weak Friday and a holiday-quiet Monday, the SPI Overnight added 41 points or 0.9%.
We have a rate decision today in Australia (2.30pm Sydney). On the move up in the Aussie since Friday, it looks like the punters are expecting action.
