The Overnight Report: Late Rally As USD Retreats

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By Andrew Nelson

The Dow finished 10 pts or 0.1% higher, while the S&P 500 picked up 0.3% and the Nasdaq finished the day 0.75% higher.

After a day that looked like Wall Street’s three-session beating would continue, stocks started to cut losses late in the session, spurred by a come back of the euro on FX markets, which pushed the US dollar down. The weaker greenback triggered buying in commodities and tech stocks. At 2:00 the Dow was down as low as 9840, but late session buying dragged the gauge back up, keeping it precariously perched above that key psychological barrier.

Still, the Dow was down about half a percent for the week, its fourth straight week of decline, in which it has lost nearly 6%. Support at 10,000 has now given in two days in a row, albeit not at the market’s close.

The morning was fairly choppy, with positive territory visited a few times after an early drop. But from 11:00 the Dow was in retreat as worries about a growing debt crisis in Europe increased the uncertainty about the US economic outlook. With the market already spooked by concerns about the rising debt problems in Greece, Portugal and Spain, news today that opposition parties defeated the Portuguese government’s austerity plan simply provided yet another reminder that European countries will find it extremely difficult to get a grip on their public finances.

The market changed direction with about an hour left after the euro started its comeback. Overall sentiment was supported by an improvement in December consumer credit.

The Federal Reserve said consumers borrowed less for an 11th straight month in December, but that total borrowing still fell far less than expected, with the decline of $1.8bn well short of the decline of $9 billion that was expected. The news was helpful in that it fuelled hopes that consumer spending could increase.

On employment, employers cut 20,000 jobs from their payrolls last month, according to a Labor Department report released before the start of trading. Employers had been expected to add about 15,000 jobs, but the January report did provide some positive signs, including an increase in the work week and an increase in temp agency employment, both of which are seen as leading indicators.

On top of the unexpected job loss for January, the past five months through December were revised to show an additional 245,000 jobs were lost than previously thought. Good thing that was then and this is now.

The CBOE volatility index, or VIX, spiked above 29 before settling back down around 26 amid the debate raging about whether or not the market is still heading for a deeper correction.

The US dollar remained a major influence on stocks, with the market pulling off its lows at the same time the dollar was coming of its highs. Earlier on the day, the greenback reached an eight-month high versus the euro and gained against other major currencies, including the Aussie, as investors looked to move assets from equities and riskier assets to relatively safer territory given the ongoing credit concerns in Europe. The euro fell to US$1.3664 from US$1.3741 late Thursday, while the Dollar Index, which represents the greenback against a basket of six currencies, jumped 0.9%.

The strong dollar once again dragged on commodity prices, seeing energy and metal stocks fall throughout most of the session. However, the last hour turnaround saw oil and gold stocks cut losses or turn higher, while the big tech stocks such as Cisco Systems, Intel, IBM and Microsoft also helping to stem the losses and eventually lead the afternoon comeback.

After speculation was dismissed that European countries would convene in an emergency meeting over the weekend, to discuss problems in Greece and other EU-members, the euro bounced back against the US dollar.

Troubled Toyota had a good day, with shares up 3.5% after the company’s chief executive apologised for the recall of 8 million cars. However, there are still some lingering doubts given he didn’t announce a new recall of the popular Prius Hybrid, despite reports of brake problems. The company had earlier advised it is taking a look at the brake systems of its Lexus hybrid vehicles, which use the same system as the 2010 Prius.

There was also some M&A news, with Air Products and Chemicals launching a hostile bid to buy its chief rival Airgas for about US$60 per share, a 38% premium to Thursday’s closing price. The deal is valued at about US$7bn including assumed debt. Airgas shares rallied more than 40%.

Spot gold held its own, ticking up US$2.80/oz to US$1063.50/ after tumbling US$47.70 or 4% to US$1060.70/oz yesterday. After falling 6% yesterday, silver managed to slow its decline, giving up just over 1%.

Crude-oil, on the other hand, continued to beat a retreat, with futures falling 2.7% in a volatile session that saw a barrel briefly drop below US$70. Oil briefly traded higher in the morning after news US unemployment rate edged lower in January, but the dollar took its toll and by the end of trade crude for March delivery was down US$1.95, or 2.7%, at US$71.19 a barrel at the New York Mercantile Exchange. For the week, crude oil was down 1.4%.

Base metals also took a beating on the LME, with ongoing pressure from a strong US dollar only adding to the wave of risk aversion based selling that has been flowing thought the sector. Turnover was high and among the metals, copper, aluminium and zinc all slumped to their lowest price level since last October, lead hit its lowest points since late-August, while tin and nickel fell to their worst positions since mid-December.

However, the late rally on Wall Street has seen the likes of BHP Billiton ((BHP)) close higher over there.

Overseas markets were once again weaker following the global rout the day before. Britain’s FTSE 100 fell 1.5%, Germany’s DAX index dropped 1.5% as well, while France’s CAC-40 tumbled 3.4%. In Asia yesterday, Japan’s Nikkei average fell 2.9%, while Hong Kong’s Hang Seng sank 3.3%.

The SPI 200 March 10 contract was down 11 points at 4464 in overnight trade.

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