Daily Market Reports | Dec 23 2009
By Greg Peel
The Dow rose 50 points or 0.5% while the S&P added 0.4% to 1118 and a new high, and the Nasdaq gained 0.7%.
When the US Commerce Department first estimated US third quarter GDP growth a couple of months ago, it came up with 3.5%. Economists then expected the figure to be revised down last month to 3.1%, but instead it reached 2.8%. Last night economists expected the final Commerce Department revision to be 2.7%, and instead it was 2.2%. So much for estimates.
This should have meant bad news for Wall Street, but traders took heart in the reason offered for the bigger than expected reduction. The difference was put down to greater than expected inventory reductions, and Wall Street actually sees that as good news. The more inventories are wound down in 2009 – and clearly they have been significantly – the greater upside for inventory growth, and thus economic growth, in 2010.
In other news, productivity gains via cost-cutting was the reason given for a 10.8% increase in corporate profits over the third quarter, the biggest gain in more than five years.
The GDP was thus not seen as a reason to sell stocks, and by contrast, the existing home sales number was seen as a reason to buy. With the help of government grants for first homebuyers which were initially scheduled to expire on November 30, buyers rushed in to send November existing home sales up 7.4% when economists had expected 2.5%. Sales are now up 46% from the January low but still 10% down from the peak four years ago. November’s result was, however, the best since February 2007. The buyer grants have now been extended, but we may yet see a bit of a drop off in December.
The well received economic news added to US dollar strength, as well it might. The dollar index rose another 0.2% to 78.25. The difference here though is that only a month ago, strong US data would have sent the dollar down as risk traders borrowed dollars to invest elsewhere, including in the local stock market. But with the Fed’s exit strategy timetable for quantitative measures now clearly specified, Wall Street is looking ahead to the first interest rate rise. Consensus still has this as June.
So where are the risk traders? The answer is: home with their families. The dollar has rallied on a combination of interest rate expectation and unwinding of previous speculative short positions. According to CME data, those shorts have now been covered and speculative US dollar positions are now neutral. Little scares like Dubai and Greece have caused dollars to be bought as risk trades have been unwound, but this late in the year it appears few risk trades are being added to. Hence there has been little downside pressure on the dollar this past week or so, and hence there has also been a decoupling of the previous dollar-up, stocks-down trend.
That’s why, for the second day in a row, both the dollar and stocks have rallied. The economic data releases are also good news for stocks, and with very few traders still left playing in 2009, there’s not a lot of resistance. The S&P 500 has today hit a fresh 2009 high. Santa has once again removed a few elves from last minute toy-making duty, and put them in front of a screen.
What is interesting, nevertheless, is that the VIX volatility index on the S&P 500 has now fallen to 19.65 after a 4% fall last night. The VIX twice hit this level in the past two months, and on each occasion the stock market took a dive shortly after. A number below 20 is seen to indicate the stock market has become complacent. At this time of the year, however, we must also consider that the market has become disinterested in buying more protection than it already has. Despite the low VIX, long put and short call option positions are seen to be already quite extensive, suggesting Wall Street doesn’t really have much downside (barring some new catastrophe).
That’s one reason why any real attempt to correct in the latter part of 2009 has failed.
Now that the Fed has ratified its timetable for the withdrawal of credit security support, longer-dated interest rates have begun to rise with gusto. The US ten-year yield was up another 7 basis points to 3.75% last night, it’s highest level in four months. The spread from the two-year yield continues to widen through record levels.
The stronger US dollar had its predictable effect on gold, which fell another US$6.70 to US$1083.70/oz. The Aussie also fell another half a cent to US$0.8769.
Volumes on the London Metals Exchange have now become pre-Christmas thin, and the dollar and a lack of interest saw all metals drift lower, with aluminium the only stand-out at down 1%.
Oil bucked the trend however, as traders stepped up for their weekly dose of humility in expecting a drawdown on weekly inventories to be announced tonight. All through 2009, analysts have been about 90% wrong with their inventory estimates. Oil shrugged off the dollar and the announcement by OPEC that it would not be cutting production levels, and the February contract rose US68c to US$74.40/bbl, picking up a dollar on the forward curve from the January contract expiry yesterday.
The SPI Overnight rose 17 points or 0.4%.
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