Daily Market Reports | Dec 09 2009
 By Greg Peel
The Dow fell 111 points or 1.0% while the S&P fell 1.0% to 1091 and the Nasdaq fell 0.8%.
I noted yesterday that markets have been driven since March by the near-zero US cash rate (affecting a weak US dollar) as dollars are borrowed to invest offshore or invest in local stocks which sell offshore. While the Fed has yet again reiterated that the cash rate will remain low for some time, again quelling rate rise fears, the other side of the equation is what might be actually going on offshore.
Last night credit ratings agency Fitch downgraded Greece’s sovereign debt from A minus to BBB plus and put the EU member on negative watch. Dubai’s debt situation may be under management now but the reverberations continue. Dubai was merely a wake up call. While it has long been appreciated that Greece has become an economical basket case, traders had previously feared defaults from former Soviet bloc nations inside and outside the EU.
Ratings agency Moody’s nevertheless chose last night to downgrade ratings on several Dubai government-owned enterprises (don’t you love the way it’s soooo far ahead of the game?) while at the same time suggesting both the US and UK are “testing the limits” of their AAA ratings. Always a good day to buy dollars.
Sovereign level fears of this nature immediately spark investors into unwinding their carry trade positions and bringing their dollars home to Mama where they are supposedly safest – into the reserve currency of the US dollar. Or in the case of non-Americans, simply into the reserve currency. The euro copped a hiding last night and the pound followed in sympathy.
It did not help the euro’s cause that Germany announced a 1.8% fall in October industrial production. Germany is the EU’s export powerhouse, and the fall in IP came as a surprise to economists who had expected a 1.0% gain following a 3.1% gain in September.
The US dollar is only the more recent carry trade currency, while the yen is the longer established borrowing currency of choice with a current cash rate of 0.1%. Those trades were also being unwound last night, which actually sent the yen higher against the dollar on relativities. This must agonise a Japanese government that is trying to flood its economy with fresh yen notes in order to keep a lid on its currency. Japan desperately wants the dollar to bounce, but to bounce against the yen as well.
The dollar index climbed steadily last night to reach 76.25 – up another half a point following the big rise on Friday. And when the dollar goes up, stocks go down. The Dow recovered slightly at the close but it was pretty much a steady one-way street otherwise.
And when sovereign debt fears surface, the debt of choice again becomes that of the world’s biggest economy. Just don’t mention the deficit. There was solid, if not spectacular, demand for the US Treasury’s scheduled auction of three-year notes last night, but the startling side-auction was that of one-month bills. This issue was five times oversubscribed, leaving bond traders scratching their heads to remember such a level of demand. And the yield buyers achieved for their enthusiasm? 0.00%.
(That’s a nominal yield by the way. Adjusted for inflation, investors are actually paying the US treasury for the privilege of lending money to the US government.)
At the micro level of US stocks there was also mixed news. The financial sector has been weak of late regardless as the two retail monoliths Bank of America and Citigroup attempt to pay back their TARP funds in time to pay Christmas bonuses (they are not allowed to pay bonuses while the government is invested). There are arguments as to how much must be paid and, in Citi’s case, how much new capital the bank has to raise in order to afford the payment. In the meantime, influential bank analyst Meredith Whitney has been calling the big US banks overvalued once more.
There was good news from global economic bellwether FedEx, which increased its profit forecast, but this was overshadowed by an earnings guidance downgrade from Post-it note maker 3M and weak monthly same-store sales numbers from consumer staple McDonalds. Shares in Kroger – America’s largest grocery chain – fell 12% after reporting an unexpected quarterly loss.
At the consumer level, the US economy is still struggling. But it is the conversely stronger US dollar sending the indices down anyway.
Gold took another beating on the dollar’s gain – down US$27.30 to US$1128.10/oz. Gold appears destined to return to its break-out level under US$1100 in the short term. The Aussie also took a hammering, down 0.8 of a cent to US$0.9046.
Oil marked its fifth straight loss – its longest losing streak in five months – falling US$1.31 to US$72.62/bbl against the strong US dollar.
Base metals began the London session firmer after Monday’s losses, but when the Greek news broke and the US dollar started running they quickly turned tail. Nickel mostly held its ground but the others were down 1-2%.
The SPI Overnight fell 54 points or 1.2%.
Stand by today for Australian housing finance numbers and the Westpac consumer confidence survey.
[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]
