Daily Market Reports | Nov 06 2009
 By Greg Peel
The Dow jumped 203 points or 2.1% to 10,005 while the S&P managed 1.9% to 1066 and the Nasdaq leapt 2.4%
Ahead of Wall Street’s opening last night, both the European Central Bank and the Bank of England made monthly monetary policy decisions, hot on the heels of the Fed on Wednesday.
Of the two, the ECB’s outlook was the more positive. President Jean-Claude Trichet left the cash rate unchanged at 1% but suggested that while low inflation was firmly anchored, the European economy was showing signs of increasing economic activity, albeit at a slow pace and with overhanging uncertainty. Traders took Trichet’s words to imply the EU rate would remain at 1% for the time being, but that further extraordinary measures adopted by the EU with regard to direct financial sector support would begin to be wound back. This is consistent with a Fed which has no intention of raising rates but is nevertheless winding down its quantitative easing measures.
The same is not the case in the UK, however. Following a surprise negative third quarter GDP result no one expected the BoE to budge from 0.5% and expectations were for quantitative easing to be stepped up yet again. This was the case, with the BoE bond purchase target being increased by 25bn pounds to 200bn pounds. The UK economy continues to struggle and pounds are being printed with abandon as Britain heads towards an election which will no doubt bring the death of New Labour.
On a net basis, the US dollar finished almost unchanged last night at 75.73 once some good US economic data were thrown into the mix. Hence we had the unusual situation of a stock market up strongly and a dollar not down strongly. But late on Wednesday we did see a big sell off in stocks – from Dow up 160 to Dow up only 30 – while the dollar actually dipped further in the Fed’s wake. If that selling thus seemed out of place, one might say we had 130 points to pick up on Thursday morning before being back to square again.
Ultimately the Dow ended up 203 points last night to close on its highs, although that high was not much higher than where the average reached by 11am. There was a lot to absorb early.
Firstly, traders and investors had more time to reflect on Wednesday’s Fed statement. There was mass confusion after the Fed’s 2.15pm release, sending the Dow screaming up and down twice before the close. On reflection, Wall Street now realises the Fed was trying to hammer home the fact that zero rates are here to stay for a long time yet, despite anyone’s inflation fears. A low rate means cheap money, and that’s good for stocks.
Then after the bell on Wednesday there were good earnings results released by News Corp and Cisco, with tech bellwether Cisco the most influential. Comments from the company that revenues were growing helped to turn around recent weakness in the tech sector.
Next came economic data. Economist consensus had jobless claims falling 8,000 last week, but they fell 20,000 to 512,000. These numbers are very volatile, but the news was well received ahead of tonight’s October unemployment data. More influential, however, was third quarter productivity.
Productivity – a measure of output per man hours worked – jumped 9.6% in the quarter, its biggest jump in six years. This was a much bigger number than expected. The immediate implication is companies are earning more without needing to spend more.
The major feature of better than expected US earnings results in both the second and third quarters was cost cutting. Revenues, on the other hand, have been tepid. Cost cutting can work both ways, either turning a company into a lean, mean fighting machine, or simply reducing the revenue base. What the jump in third quarter productivity suggests is that the former is more the case. That’s the good news.
The bad news is that over the same period, labour costs fell by 5.2% to mark the biggest twelve-month fall since records began in 1948. This is a reflection of lay-offs and reduced hours worked which, while healthy for bottom lines, is not good news for the US consumer economy. If productivity can be increased without the need to hire more labour, then why hire? Tonight we learn the October unemployment rate.
The other positive bit of news was the monthly same-store sales results from the major retail chains, which also surprised to the upside, if only slightly. Net gains of 2% hid a mixed bag of numbers, in which the surging and seemingly impervious teen market took a breather this month, while the downtrodden high-end market surprised by picking up. But throwing all three economic data points together – jobs, productivity and sales – Wall Street decided things looked rosy.
It is unusual for Wall Street to move so sharply in any direction ahead of employment data, but traders suggest there is more of a fear of being short right now than being long. The US dollar had looked like bouncing, but has remained weak. Third quarter earnings continue to look reasonable. An interest rate rise is way off the agenda. So last night, there was no three o’clock wave.
The magic number tonight is 10%. Wall Street consensus has unemployment moving up from 9.8% to 9.9% in October, so if the reading is 10% or above this will not be good news. However, if double digits are not reached, traders feel Wall Street is setting itself up for another run following several days of net weakness. The previous closing high in the Dow is 10,092, which is only 0.8% from last night’s close of 10,005.
This does, nevertheless, highlight the dangers of paying too close attention to the 30-stock average. The S&P 500 broad market index is still 3% away from its high mark.
There was little movement in commodities last night given a virtually unchanged dollar index. Gold slipped US$4.10 to US$1090.70/oz and oil fell US78c to US$79.74/bbl. London base metal movements were again negligible. The Aussie slipped slightly to US$0.9102.
The SPI Overnight rose 59 points or 1.3%. Can the local market shake off its sulky mood today?
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