Daily Market Reports | Oct 27 2009
By Greg Peel
The Dow closed down 104 points or 1.1% while the S&P lost 1.2% to 1066 and the Nasdaq dropped only 0.6% in the wake of a couple of positive earnings reports.
Last night’s trade was really a case of finding the straw that would break the camel’s back. A series of factors conspired to create tension in the markets, and that tension hit a climax just after 11am in New York. At that point the Dow was up 100 points. One hour later it was down 100 points. That 200-point swing in one hour encapsulated the whole day’s trade.
We have had a 60-odd percent stock market rally from March without one “correction” if you consider a 10% pull-back to signify a correction. Stock buying has become thinner of late. The US government bond market has proven surprisingly resilient, suggesting much of the famed “cash on the sidelines” is content to live within a more balanced portfolio of debt and equity post-GFC. Many have referred to the Treasury bond “bubble”. Oil has pushed to over US$80/bbl, and at that point it seems that while the rally in oil from US$32 to US$80 has been well received as a sign of recovering global growth, oil above US$80 suggests a return to considerations of rising energy costs acting as a drag on economic growth. And most importantly the world has become universally short the US dollar, believing the US debt burden to be too great and that the rest of the world’s economies to be in a better position to recover ahead of the US.
Last night’s session begun like many others before it recently. Positive earnings reports set the tone and the US dollar again weakened following more talk from China about diversifying into yen and euro and the announcement yesterday that the South Korean GDP had leapt into positive territory at 2.9% growth, to post its biggest single quarter jump in seven years. The euro traded up to a new recent high of US$1.5062. But elsewhere the tension was mounting.
Articles in both the Wall Street Journal and the New York Times over the weekend suggested the Fed, which has a monetary policy meeting next week, is close to laying down a time frame for stimulus exit strategies and the eventual increase in its funds rate. The US expects a positive annualised GDP reading of 3.2% on Thursday, and while Asia might be strong the weak UK GDP announced last week shows the US is likely in a much better position than at least the “old world” of Europe and Japan. Is a rate rise not due?
Regulatory authorities are currently in discussions about the “too big to fail” concept within the financial industry, and Wall Street has become concerned a stiff regulatory reaction might lead to the forced break-up of larger institutions. At the same time, news out of Bank of America is that the likely TBTF candidate is struggling in its attempts to repay its TARP money as quickly as possible given the ramifications for its remaining capital adequacy.
Over the weekend it was announced the number of US banks filing for bankruptcy had reached 106. Last night commercial lender Capmark joined the list after posting a US$1.6bn quarterly loss. Capmark is variously owned by firms such as Goldman Sachs and private equity specialist KKR and is one of the country’s biggest lenders on commercial real estate. The question of whether commercial real estate is the final shoe that has yet to drop has long haunted Wall Street. In responding to Capmark’s demise, commentators suggested the world’s growing belief that problems in credit markets have eased back to comfort levels are premature.
Aside from talk of a Fed rate rise in the offing, this week marks another record issue of US Treasury bonds. For arguably the first time since the Treasury began beating its own record month in, month out in recent times, the bond market has become quite nervous. The ten-year yield has been ticking up of late and its rise began to accelerate last night even as the Dow was rushing back up across the 10,000 mark once more. The ten-year yield ultimately climbed 8 basis points to 3.56%.
It is not entirely clear what gave first, and that’s no surprise as it has been hard to determine recently whether the dollar is leading stocks, or stocks are leading the dollar, or both are chasing each others tails. But just after 11am, with bond prices under pressure and financial stocks starting to give way, the dollar bounced, and bounced hard. The euro crashed back through the US$1.50 mark to US$1.4847.
The response was rapid, and in one hour the Dow had dropped 200 points. Commodity prices, which have been driven only by a weak US dollar of late, tumbled, sending the materials and energy sectors spiralling. The financial sector was spiralling on its own.
In the wash-up, the US dollar index had jumped 0.8% from Friday to 76.07. The Aussie lost 0.7 of a cent to US$0.9148. Gold plunged US$16.50 to US$1038.30/oz. Silver fell 3%.
Oil dropped US$1.82 or 2.3% to US$78.68/bbl. Base metals, which had been rising in the early London session as the euro pushed higher, turned tail and fell. Copper ended down 1.5%, nickel 3%, tin 1% and lead 4% while aluminium and zinc gave back their gains.
This is not the first time the US dollar has posted a little bounce within its general down-trend lately, but it seems to date the most significant bounce. As has oft been stated, the world is historically short US dollars, setting itself up for a mad short-covering scramble were, for example, Ben Bernanke to hint at a foreseeable rate rise in his statement next week. The stock market has long been overdue for a pull-back in most eyes. Commodity markets have been running only on the weak US dollar and nothing else. The US bond market has been holding up surprisingly in the face of all of the above. There was a feeling building that something had to give.
For the last week or so the US stock market has been carving out a toppy-looking pattern, bouncing up and down 100-odd Dow points with abandon on low volumes, and failing to materially punch through to new highs. This could be simply another consolidation pattern before the next assault (the same occurred in the June quarter earnings season) or this time it could be for real. It is, after all, October. Having tested 20 points, the VIX volatility index has bounced back to 24.
The SPI Overnight was down 40 points or 0.8%.
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