Daily Market Reports | Dec 05 2009
By Andrew Nelson
The Dow finished almost 22 points or 0.2% higher at 10388, while the S&P 500 picked up 0.54% and the Nasdaq finished almost 1% stronger.
By far the biggest story of the day was the surprise improvement in the US unemployment rate. The news sent the Dow more than 140 points higher to post a new 14-month high in the wake of the release.
However, the euphoria wore off by late morning, at about the same time the US dollar went on a run. The net result was a Dow that chugged along in a fairly tight range on either side the gain line for the rest of the day.
Adding to the good economic news, factory orders rose a surprise 0.6% in October versus expectations for the measure to remain unchanged. Just as good was news that September’s reading was also revised higher.
The Jobs read was this week’s most eagerly anticipated economic report and it certainly didn’t disappoint. The US Labor Department reported before the opening bell that the US economy shed only 11,000 jobs from non-farm payrolls in November. The unemployment rate fell to 10% from 10.2% in October, with the most optimistic in the market expecting a flat read at best on the back of another six-figure decline in payrolls.
And for an hour and a half the market did just what you’d expect, rally. But after that the reaction to the read was fairly disappointing, reinforcing the importance of the so-called risk trade in recent months. What happened was the good economic news was quickly replaced by ipso facto fears that an economy recovering too quickly will all the sooner face the prospect that the Federal Reserve will have to raise interest rates to keep track with the improvement. Traders of late are becoming more and more likely to increase or decrease their exposure to stocks based, not on the economy’s fundamentals, but primarily on the cost of borrowed money.
So what started off as good news quickly turned to bad, because an improving economy and the hint of higher rates put a rocket under the US dollar. The greenback extended its gains over the course of the afternoon as rival currencies gave way on the belief that US interest rates could rise earlier than previously thought.
The revival in the dollar took it to its biggest single-session advance on the yen so far this year, up 2.8%. It was a one-month peak against the yen and its highest level in two weeks against the euro. The Aussie also took it on the chin, losing 1.2c over the last 24 hours. The US Dollar Index, which measures the greenback against a basket of six foreign currencies, also hit a one-month high, rising 1.7% since over the last 24 hours.
Since the market hit bottom back in March, stocks and the dollar have had a strong inverse correlation. When the US dollar falls, stocks tend to rise and vice versa. At least some of this correlation is due to the carry trade, where investors borrow a currency offering relatively low borrowing costs in order to invest the proceeds in higher-yielding assets denominated in that low-yield currency. As such, the recent strength in the US dollar is now causing investors to unwind some of their dollar carry-trade positions.
The dollar’s rally took a heavy toll on commodities prices. Gold was hit about the hardest, snapping a four-day winning streak and suffering its biggest one-day fall in more than a year and a half. All told, the metal fell US$60.60, or 5% to $1,156.20. Gold of late has tended to firm when the US dollar falls, as the greenback’s weakness gives investors more reason to buy hard assets as a currency alternative that will hold value when paper currencies depreciate. However, the same is true when the dollar rises, as gold has tended to fall when its attraction as a hedge to a deflating dollar wanes.
Crude-oil futures also fell Friday, erasing weekly gains on the back of the strength in the dollar. The funny thing is the jobs report actually pushed up oil prices to near US$78 a barrel in early trade, as more jobs means more drivers driving more places. But as the US dollar kicked, oil turned lower, with crude oil for January delivery dropping US99c, or 1.3%, to end at US$75.47 a barrel on the New York Mercantile Exchange.
Base metals ended mixed, with the London session benefiting from the positive economic reads from the US, but luckily missing out on much the downside from the dollar’s subsequent run.
Yet commodities were definitely the sore spot on Wall Street during today’s trade, with most other sectors finishing comfortably in the black. Alcoa, DuPont, Exxon Mobil and Chevron were among the Dow’s big losers. Chemical company DuPont slumped 7% after it said its seed business will delay the release of several products. Tech leader IBM and financial firm Travelers were among the other big losers.
Bank of America was the most heavily traded stock on the day by a wide margin, with shares rising more than 2% after the bank raised almost US$19.3 billion in a stock offering late Thursday. The bank plans to use the money to help pay back the US$45 billion it owes the government in TARP funds. Citigroup is now in the unenviable position of being the last big bank tied to the US government.
In other markets, shares in Europe gained, with London’s FTSE 100 up 0.2%, Germany’s DAX up 0.8% and France’s CAC 40 up 1.3%. Asian markets were mostly lower yesterday, with the exception of Japan’s Nikkei.
Things are looking a little more upbeat closer to home, with the SPI sitting 23 points higher at 4729.
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