Daily Market Reports | Jan 22 2010
By Rudi Filapek-Vandyck
On Wednesday (US time) Wall Street and commodity markets put in their worst performance in more than two months. Yesterday, they did even better (or worse if you happen to be in the market).
Dow lost more than 2% to close at 10,389.88 (-213.27), S&P500 lost 1.89%, Nasdaq lost 1.12%.
Copper is now at US$7280/t, crude oil at US$76.13/bbl and gold below US$1100/oz.
More ominously, perhaps is that US indices closed at or near the lows of the day.
Reasons for the two-day sell-off are ongoing concerns about valuations overall, a strengthening US dollar, fear for tightening measures in China (global inflation is back and this includes the UK too) and yesterday we had one extra-punch below the belt for Wall Street: Obama going full force for the popular vote by taking an unexpectedly hard line on Wall Street and greedy bankers.
After being seen as giving in too easily in the earlier phases of the GFC to the demands of the too-big-too-fail US financial sector, the US president under pressure has now firmly turned coat.
Yesterday, president Obama unveiled plans to limit the size and scope of large financial institutions, similar to recommendations made by former Federal Reserve Chairman Paul Volcker.
In particular, the toughened stance would bar proprietary trading activities by large banks that take in federally insured deposits. The proposals would prohibit commercial banks from owning or investing in hedge funds or private equity outfits, while also strengthening existing rules limiting market share among big banks.
His intentions are clear: “Never again will the American people be held hostage by a bank that’s too big to fail”.
Wall Street didn’t like it and started selling, with banks and materials stocks in the (negative) lead. Fast food champion MacDonald’s was the sole and clear outperformer among major stocks, but even “Macas” was constantly struggling to remain in positive territory.
But step aside and ignore the news headlines for a moment. Yesterday, I reported this week’s price weakness had pulled back various markets to trendline support on price charts, and on the brink of breaking through these lines to the downside. Today, there is no longer any question about it: financial markets are breaking their positively trending technical support lines.
One can discuss the dangers, flaws and merits of technical analysis for days, and still reach no consensus. But when events like this happen across assets, I think investors should pay attention. Sometimes the market is trying to tell a story. Better not to ignore it.
Listen carefully.
Last time a similar event took place was in August 2008. At the time I predicted the most severe correction for commodities in human memory was about to take place. I am not making a similar prediction today, but surely the conclusion has to be: the trends that have supported risk assets since the second week of March last year are now faltering, and serious damage is being done.
Maybe this is as good a time as any to re-read the analysis I published late last year about history and years ending on zero: “History Suggests No Great Return For Year Zero“
It is striking, to say the least, that equities in Europe too show no intention of at least stabilising (one could argue the new Obama policies are very US oriented): the DJ Euro Stoxx 50 fell 1.8% to 2863, the German DAX lost 1.8% to 5747 and the FTSE was 1.6% lower at 5335.
For once, investors completely ignored the fact that Goldman Sachs -again- managed to blow away market expectations by reporting a quarterly profit of US$8.20 a share compared with consensus forecasts of $5.20.
In economic news, the Labor Department announced the number of people applying for unemployment benefits rose by 36,000 to 482,000 in the week ended January 16. The Philadelphia Fed survey fell to 15.2 in January (median 18.0) from 22.5 in December. The US leading indicators rose 1.1% in December (clearly above expectations).
More good news came from the World Bank upgrading its global GDP growth forecast to 2.7% (revised up from 2%) and to 3.2% for 2011. In Europe, the Eurozone manufacturing PMI rose to 52.0 in January (median 51.9) from 51.6 in December.
Commodities had another negative session. This time it wasn’t the US dollar, or China tightening that were causing the damage (though both remain negative factors) but waves of technical systems-based selling orders kicking in. Too many people had become too positive on continuously up-trending commodity prices and the market correction is now shaking the tree back into a better balance.
Traders at the London Metals Exchange are reporting “heavy” turnover volumes for the second day in a row.
Intra-day moves were erratic and violent, but there is positive news with traders reporting buying support coming in as losses widened. Copper, earlier on the day trading as high as US$7,500/t, dived as low as US$7,220 at one stage. This was the metal’s lowest price level since December 29, representing a peak-to-trough move of 3.7%.
The overnight fall saw prices breach the 10- and 30-day moving averages (DMAs) around US$7,457 and US$7,230 respectively. Crucially, the market managed to close above the latter with copper recovering to US$7280 in the 5-7pm (after-market) trade.
Negative sentiment was further exacerbated by a big 8,000-tonne stock increase to 534,650 tonnes, the highest level since early March 2009.
Traders said buying support was due to a “very favourable arbitrage” between the Shanghai and London markets. Earlier this month, copper futures reached as high as US$7,796/tonne.
Aluminium fell below its 10DMA and 30DMA at around US$2,290 and US$2,260 respectively, closing at $2,238, down a little less than one percent from the previous session. According to basemetals.com, aluminium was undermined by inventories in LME-registered warehouses jumping a hefty 18,525 tonnes to a fresh all-time high of 4,640,750 tonnes. The inflow, as well as Tuesday’s 43,875-tonne increase, was off-warrant metal being registered to take advantage of long-term storage deals, traders said.
In other metals, lead’s woes were exacerbated by the breach of the fund-sensitive 100DMA at around US$2,300/t. Lead managed to recover to US$2295/t after having been as low as US$2,220.75/t. Stocks climbed 1,000 tonnes to 153,175 tonnes, a fresh high for lead since October 2003.
Zinc fell as low as US$2,385.25/t before it recovered to US$2,427. Nickel miraculously managed to stay above technical support levels, even though its inventories resumed their uptrend, rising 414 tonnes to 161,706 tonnes. Tin similarly held above chart trigger points. Both metals recorded minor losses only on the day.
Crude oil continued its losing streak with a US Energy Department report showing US refineries slashed operating rates as fuel demand declined. WTI futures contract for March fell 2.1% to US$76.13 a barrel. (For those who have paid close attention to my stories over the past ten days: crude oil futures are still not inside the US$75-70/bbl trading range I suggested they are heading for).
Spot gold is still in search of its lost safe haven status, a result of having endured a speculative bubble in October-November-early December last year. The after-effects of such bubbles always last longer than most of us expect them to. Spot gold declined 1.1% to US$1,098.40 an ounce, breaching the US$1100/oz support line many bulls had been expecting would hold. Surely the next target now must be technical support at US$1080/oz.
Equally, silver could not stay above technical support at US$18/oz.
The US dollar tried to rally further last night, but was ultimately pulled back. This reversal also assisted metals to recover from earlier losses. The USD index ended the day around the same level as on the previous day. The AUD had another bad day, feeling the pinch from a sharp retreat in global risk appetite. On Friday morning, AUD/USD opens the Asian session lower at 0.9030. AUD/EUR opens weaker at 0.6400. AUD/JPY opens lower at 8150. AUD/NZD opens higher at 1.2679, relatively unchanged from Thursday close.
US bond yields were lower overnight as stocks fell amid concerns that President Barack Obama’s regulation plans would reduce risk-taking at banks, increasing the appeal of safe haven assets. The yield on 2-year notes lost 3bps to 0.837%, whilst the 10-year yield fell 4bps to 3.607%.
The Australian SPI 200 Mar 10 futures contract was down 80 points or 1.8% to 4721, suggesting today is the day of market capitulation all around. Yesterday, the ASX/S&P200 index closed below technical support at 4850.
Greg Peel will be back after Australia Day.
[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.]
