Daily Market Reports | Jan 20 2010
By Rudi Filapek-Vandyck
SPI futures are indicating a buoyant opening for Australian equities on Wednesday.
Dow gained 115.78 (1.09%) to 10,725.43, the S&P500 gained 1.25% to 1150.23 and the Nasdaq outperformed again with a 1.42% gain to 2320.40.
Market opinions remain divided as to whether US equities will surge through the US corporate results season or whether last week’s pause marks the beginning of a broader market pullback. The division cuts through all sorts of investors and experts, from bears to bulls, and from fundamental commentators to technical analysts.
Last night, however, there never was any question which direction US equities were going to take: from the opening bell the Dow surged to 10,700 (up 100), consolidated around the level for a few hours and then stormed further in the final hours of trade. The S&P500 pretty much copied the same scenario, while technology stocks, and thus the Nasdaq, performed even better. Both the S&P500 and the Nasdaq closed at 15 months highs.
The remarkable factor last night was that the US dollar strengthened too (more on that later).
Citigroup reported before the market opened and the release didn’t fully meet market expectations. Let’s label the event mildly disappointing. Other negative factors pre-opening included Aluminum Corp of China announcing it expects to post a net loss for 2009 (remember Alcoa?) and German analyst and investor sentiment declining more than expected in January to the lowest level since July. The closely watched monthly ZEW survey revealed its economic sentiment index fell to 47.2 from 50.4 in December, lower than expectations for a reading of 49.5.
Later on, the NAHB Housing Market Index came in below expectations, falling from 16 to 15 in January – marking the lowest level in six months. Home builder sentiment fell in all four US regions. Also, TICS Flows showed foreign investor appetite for US securities rose in November. Net overall capital inflows into the US rose from US$25.4 billion to US$26.6 billion in November.
So why did the market surge more than 1%?
Let’s call it a combination of renewed buying interest following last week’s pullback, supported by the general view that things will get better later this year, plus earnings optimism with regards to technology companies, plus a general realisation that the US dollar is doing its own thing at the moment (and thus should no longer act as a contrarian indicator for risk), plus optimism that China’s series of economic data on Thursday will once again beat market estimates.
Above all, however, it was the chance that US Democrats face the possibility of losing a Senate seat held by the late Edward Kennedy as voters in Massachusetts go to the polls. A possible loss could cost the Democrats a 60-vote supermajority needed to help pass the much discussed (and controversial) health-care system overhaul. Wall Street loved the unexpected opportunity and bought en masse into healthcare stocks last night.
Technology stocks remained in the lead too, with IBM posting well-received results and a positive outlook after the market’s close, and with stocks such as Apple and Ciena Corp accumulating ever increasing buying orders. Ciena received a recommendation upgrade to Buy from Credit Suisse on the day.
As stated above, the overall buoyancy in equities markets occurred parallel with a strengthening US dollar. EUR/USD weakened further overnight and opens today’s Asian session at 1.4290. USD/JPY opens higher at 91.11, gaining steadily. AUD/USD dipped to an overnight low of 0.9175 but later pared some losses to open higher at 0.9240. AUD/EUR opens strong at 0.6465 after a relatively quiet session. AUD/JPY trades at 84.20 after whippy session and the AUD/NZD opens at 1.2510 trading flat overnight.
However, the star performer on global FX markets remains the British pound. Yesterday, the GBP strengthened against all 16 major counterparts, gaining 0.8% versus both the Swiss franc and the euro. December consumer prices advanced 2.9% in the UK from a year earlier, one full percentage point more than in November. The release by the Office for National Statistics marked the strongest rate of inflation since 1997.
It is my suspicion that traders and investors read the recovery for the greenback more as ongoing euro weakness, and thus they largely ignored the contrarian trade impulse last night.
AUD/USD is at 0.9237 this morning after an overnight range of 0.9175-0.9265 with an indicative range today of 0.9190-0.9290 (ranges provided by National Australia Bank).
Commodities initially opened on a weaker note in London last night, after which copper managed to surge, taking other metals along in its slipstream. Why did copper surge amidst more signals of rising inventories? Simple, because rising inventories represent the current lack of sufficient demand in the present day market. Someone took the view last night that things will be alright going forward, and others were all too willing to follow.
Apart from speculation about positive data releases in China on Thursday, the Shanghai/LME arbitrage window, which opened for the first time in four months earlier this month, stood close to US$100 per tonne on Tuesday. This triggered market speculation that any price weakness will trigger Chinese buying.
Meanwhile, copper stocks in Comex warehouses rose above 100,000 short tons on Friday, adding 300 tons to 100,217 tons, while LME inventories grew 3,300 tonnes to a 10-month high of 526,750 tonnes on Tuesday.
Analysts at Macquarie suggested last week that copper imports in China could rise to 800,000-850,000 tonnes in the first quarter this year, compared with around 620,000 tonnes in the fourth quarter last year, as the arbitrage window between the Shanghai and London markets opens wider.
In addition, analysts at Standard Chartered announced they had lifted their 2010 average copper price forecasts. For 2010 as a whole, copper is now anticipated to average US$7,675 per tonne, up 14.6% from the previous forecast of US$6,700. For Q1 the average price forecast stands at US$7,850 per tonne, before receding to US$7,550 and US$7,300 in Q2 and Q3 respectively. Q4 is expected to show an average price of US$8,000 per tonne.
As such, Standard Chartered’s Q1 price forecast suggests copper prices should rise between now and late March, supporting the view that buying now for gains later seems but an appropriate strategy.
On closer inspection, Standard Chartered’s update on copper contained some warnings for prices past March, with the analysts stating subdued demand across the rest of the world, coupled with strong market-driven advances in recent weeks, could result in a correction later in the year. The analysts commented they are concerned copper prices have already moved up a long way in a short space of time, in anticipation of market tightness through 2010 and due to fund buying.
Yesterday’s trade, however, was all about the short term momentum, driven by the general view that prices will move up after last week’s weakness and copper’s lead led to recovering prices across the LME-spectrum.
Aluminium initially fell back below the US$2,300/t chart pivot level, but recoved with the last trade at US$2,293 – down just US$10.50. Yesterday morning, stocks surged a net 43,875 tonnes to 4,623,175 tonnes, close to the record high of 4.629 million tonnes set in September last year.
Nickel rose to its highest since early January, closing up US$310 at US$19,200/t amid signs the flood of stock increases was abating – yesterday saw the second daily inventory fall in succession.
Lead fell US$40 to US$2,425/t, stymied by stocks rising 75 tonnes to a fresh high since October 2003 at 151,425 tonnes. Zinc rose US$23 to US$2,503/t. Tin was just US$5 lower at US$17,975/18,000/t. Tin stocks climbed 40 tonnes to 27,400 tonnes, a new high since November 2002.
The same logic as for copper was applied to the oil market, with crude oil futures jumping higher from a three-week low. WTI futures contract for February rose 1.2% to US$78.95 a barrel. Spot gold increased 0.4% to US$1,138.40 an ounce.
US wheat, however, fell 2.1% on expectations that world production would outpace consumption. Soybeans declined 1.0%, but sugar rose 4.9% on speculation that increasing demand and limited supplies would widen a global deficit for the commodity. Corn was initially higher on speculation that the lower prices would increase export demand but later pared gains to end 0.6% down. Palm oil futures rebounded from an eight-week low to close 0.2% higher.
US bond yields rose for the first time in three days as stocks gained, dampening demand for US debt amid speculation that the recent rally may not be sustained. The yield on 2-year notes gained 2bps to 0.886%, whilst the 10-year yield rose 3bps to 3.704%.
Greg Peel will be back after Australia Day.
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