Daily Market Reports | Nov 10 2009
By Greg Peel
The Dow rose 203 points or 2% to 10,226 – a new post-GFC high. The S&P rose 2% to 1093, remaining only 0.4% away from the previous closing high of 1097. The Nasdaq rose 1.9% to be 1% below its previous high.
Activity in the past three trading sessions on Wall Street represents a ground swell of building support rather than a knee-jerk reaction to data or earnings. Last week the Fed made it abundantly clear it would keep its funds rate at near zero for the foreseeable future, silencing those who have been anticipating a Fed rate rise very soon. It has taken a while to sink in, but investors now realise the Fed has provided the green light to use the US dollar as the carry trade currency for investment in whatever takes one’s fancy. Money is free.
Ahead of the Fed meeting last week, Wall Street had been correcting on the basis that (a) stocks had become overbought, (b) the US dollar had become oversold and was due a correction, and (c) the Fed might be forced to indicate an end to free money in the near term. But stocks bounced heavily on Thursday on the Fed’s emphatic statement, suggesting short-covering from those set for a bigger correction. Friday was unemployment day, but even a worse than expected 10.2% rate meant only a pause in the thinking, not a panic. Last night, it was on for young and old.
There’s an old expression in the market, “You can’t fight the Fed”. If Helicopter Ben wants to keep throwing printed cash at the financial system in order to save its hide then there is little point in arguing. But the expression has now become universal. Despite fully expecting the G20 finance ministers to simply reiterate their support of ongoing stimulus at their meeting on the weekend, Wall Street still took encouragement from exactly that reconfirmation. Not only can you not fight the Fed, you can’t fight the collective power of central banks and governments across the developed and emerging world.
And the Fed’s emphatic statement has also appeared to put to rest any thoughts of a big bounce in the US dollar. Last night the dollar index fell three-quarters of a percent to 75.05 to once again test 2009 lows.
In the mid stages of the rally from March, the Dow Jones Industrial Average of the 30 largest-cap stocks lagged the S&P 500 broad market index. The S&P was back to positive in 2009 long before the Dow as investors piled into smaller-cap stocks with more upside potential. But as the US dollar has continued to fall, one significant factor of the Dow components has come to the fore – they are collectively large exporters. And that is why the Dow has now pipped the S&P on the race back up to new post-GFC highs.
Lost in the wash has been the September earnings season, which has been sufficiently positive on the earnings line to support this latest round of buying but still worrisome to some on the revenue line. Revenues have tended to beat expectations, but not by a lot. The US dollar has become the primary focus nevertheless, and it is back at its lows. Americans may rail against the weakening of their once powerful currency, but the simple truth is a weaker dollar is good for both the export economy and the need to reduce the deficit. Clearly neither the government nor the Fed is concerned about US dollar depreciation at this point, despite hollow rhetoric to the contrary.
While significant slack in the US economy (unemployment, idle capacity) might be enough to keep a lid on price and wage inflation, and thus allow the Fed to maintain a low cash rate, the other concern has been monetary inflation. Just how many dollars can the US Treasury print, and when will the world stop buying them (ie lending America money)? Well it’s a bit of a chicken and egg situation. Last night a record auction US$40bn of three-year Treasury notes was “stunningly” supported, in the view of one bond trader.
If the Fed is going to keep its cash rate on hold, then bond yields are not going to rise (ceteris paribus) as a result, meaning bond prices will not fall. Thus Treasury bonds, particularly in the maturity range from two-years to ten-years, are an alternative yield investment. The tens are yielding 3.49% while the S&P 500 is currently yielding under 3%. If investors are reluctant to throw too much weighting into stocks this time around, then bonds remain attractive. As long as the world keeps buying Treasury bonds, the Fed will not have to raise its funds rate in order to encourage buyers to fund the deficit. As long as bonds remain attractive, the world will do so.
That is the chicken and the egg. One wonders just when ongoing bond issues become too much.
There may be no inflation therefore, but this hasn’t stopped gold. Gold remains on a tear since India made its big purchase last week which indicated emerging markets would find another way to sterilise themselves against a depreciating greenback. Last night gold closed above US$1100 for the first time, up US$5.80 to US$1102.20/oz.
The Aussie dollar has leapt over 24 hours by 1.3 cents to US$0.9296.
Oil has struggled to meaningfully break the US$80/bbl mark, but realistically the US dollar is still only sitting on its previous lows. Last night, however, there was more to drive oil than just a weak currency, as Tropical Storm Ida approached the Gulf to herald the beginning of hurricane season. Oil was up US$2.00 to US$79.43/bbl.
Base metals are also struggling, and remain below earlier highs. The weaker US dollar spurred some commodity fund buying in London overnight but trade was choppy and the metals pulled back from intra-day highs. Metal investors have to come to terms with the fact a weaker dollar means mathematically higher prices, but that ongoing stimulus from the Fed in particular and the G20 in general is a response to ongoing economic uncertainty. Last night copper rose 1% and aluminium 2%, while tin fell 1% and the others were little changed.
The SPI Overnight was up 78 points or 1.7%.
The ASX 200 finished at 4764 yesterday following two solid sessions of gains. The latter belied an inconsequential lead-in from Wall Street, but the AXA-AMP deal provided some solid general impetus. Consolidation and rationalisation is a common feature post economic shocks, and there has been plenty going on on Wall Street as well. There seems little to prevent another solid day locally today. The previous high in the ASX 200 is 4859, which is 95 points or 2% away.
The third attempt at correction has failed. Damn the torpedoes.
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