Daily Market Reports | Dec 04 2009
 By Greg Peel
The Dow fell 86 points or 0.8% while the S&P fell 0.8% to 1099 (it just can’t seem to hold for long over 1100) and the Nasdaq lost 0.5%.
Thursday was performance of services index day across the globe – a measure of the growth in output of everything from hairdressers to stockbrokers. Service industries basically include everything that is not manufacturing or construction. Australia kicked off the round positively yesterday, with an increase from 50.2 to 52.5 in November for this 50-neutral index. Numbers above 50 imply expansion.
The EU chimed in last night with a steady rise from 53.0 to 53.7, while the UK remained relatively happy with only a slight dip from 56.9 to 56.6. But it was a different story in the US. Economists had expected November’s index to read 51.5 after sneaking into expansion territory in October at 50.6. A result of 48.7 was thus very disappointing. Not only did the ISM services index drop, it dropped back into contraction territory, and to make matters worse the US services sector represents around 80% of US output.
The service sector number followed Tuesday’s US manufacturing sector number, which showed a drop from 55.7 to 53.6.
Wall Street had briefly opened to the upside last night – Dow up 55 – after the early weekly jobless claims number was released. Economists had expected new jobless claims to rise but instead they fell last week, by 5,000. But the rally did not last half an hour as the services index turned Wall Street around, and hot on the heels were the monthly same-store sales figures from the major retail chains.
Stores measure their monthly sales against the same month last year, and last year November sales were pretty woeful coming, as they did, in the immediate wake of Lehman. Economists were thus assuming it wouldn’t take much to beat last year’s numbers, even if this year’s sales were not spectacular, and had pencilled in a 3-4% net increase. There were thus some dropped jaws when the net figure came out at negative 0.3%.
There was little discrimination, as while high-end retailers continued to suffer at the expense of discount stores, discount stores also had a tough month. And this was despite many stores cutting prices even further ahead of the Black Friday splurge. Retailers were quick to put some sort of spin on it, suggesting an unseasonably warm autumn meant the usual sale of winter woolies was slow and thus sales should recover in December. Economists are boldly predicting a 2-3% rise on last December’s numbers.
The stock market thus returned to the flat line and there it remained all the way to 3.30pm. It appeared that traders had decided not to get too carried away ahead of tonight’s unemployment number, and at the same time Fed chairman Ben Bernanke was in Washington being grilled by a Senate committee as part of the mandatory process of being approved for a second four-year term. Bernanke was attacked by some on the Fed’s failure to see a financial crisis coming (albeit Bernanke came in right at the end of the credit boom created by his predecessor, Alan Greenspan) but was otherwise also praised for his handling thereafter. Uncle Ben will be back.
At 3.30pm Wall Street lost its bottle. The early positive jobs claims number might have bade well for a decent result on unemployment tonight (economists expect unchanged at 10.2%) but a few hours to mull over a contracting services industry and very weak retail sales clearly meant some doubt crept in. The Dow tanked to be down 86 points at the close, yet overall volume remained typically thin.
It is now a case of two steps forward and one step back for the US economy. The third quarter GDP was revised down last week from an initial growth estimate of 3.5% to 2.8% and there’s still another revision to come. The pace of growth manufacturing sector slipped in November and the much bigger services sector slipped back into contraction. Ahead of Christmas, retail sales do not look promising. It is fitting that Bernanke should have been testifying last night, as he has constantly warned of a positive but lumpy and sluggish recovery which justifies near-zero interest rates for the foreseeable future.
The US dollar index was little changed at 74.63. One might have expected the dollar to be weak on the economic data but developments across both oceans ensured a counter-effect. Japan has now indicated that its strategy to slow a rising yen will not be a simple one of buying US dollars, but rather it will use the opportunity to reflate a deflationary Japanese economy by straight out printing money. In the meantime, it was none too surprising that the ECB left its cash rate at 1.0% last night but the market was disappointed that president Jean-Claude Trichet provided no indication of an exit strategy from its policy of “extraordinary measures” (surrogate quantitative easing). Hence it was a major currency stalemate.
It was a quiet night on commodities markets, which were all shut before the late drop on Wall Street. Gold rallied another US$4.70 to US$1216.80/oz, oil fell US14c to US$76.46/bbl, and in London base metals were weaker on weak US data. Aluminium and tin were down 1% and lead and nickel 2%, while copper was little changed.
US bonds had been highly sought after in November, with the ten-year yield falling from above 3.5% to 3.2%. But selling has crept in these last few days, sending the tens back up to 3.37% last night. US Treasuries remain the great mystery of the market at present, given the weakness of the US dollar and a gold price surging on monetary inflation. One would assume the desire to lend the US government ever more money might have begun to wane by now, but it appears a lot of that famous “cash on the sidelines” which might have hit only the stock and commodities markets back in, say, 2007, is now being rebalanced into bonds in a return to more conservative portfolio management. Once bitten.
Nevertheless, many fear the US bond market is now a bubble waiting to burst.
The Aussie crept higher again over 24 hours to US$0.9275.
The SPI Overnight fell 34 points or 0.7%.
Stand by for tonight’s US unemployment numbers.
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