Daily Market Reports | Mar 11 2010
By Greg Peel
The Dow added only 3 points but the S&P gained 0.5% to 1145 and the Nasdaq surged 0.8%.
It was the tenth anniversary of the peak in the Nasdaq index last night. The tech-laden automated index hit 5132 on March 10, 2000, before the dotcom bubble famously burst. Closing last night at 2359, the Nasdaq is still 54% lower than its peak, but it is the only one of the three major indices trading at a new high for 2010.
We tend not to pay too much heed to the Nasdaq in Australia, driven, as it is, by all sorts of whizz-bang technological names that simply do not have Australian counterparts of note. Technology is nevertheless an important sector in the US given it is a major source of exports (just think iThings) and hence crucial to US economic recovery.
In Australia, and across the world, we tend to look to the Dow Jones Industrial Average for guidance, while at the same time recognising the S&P 500 as the more realistic equivalent to our ASX 200 (which is also calculated by Standard & Poor's). The thirty-stock, price-averaged Dow is really an anachronism but history dictates we talk of US market movements in terms of Dow points.
The Dow is currently the laggard amongst the three, providing some indication that the rush to buy the big caps earlier in the year-long rally as the first to bounce has now abated to a more stock-specific investment climate. Last night it was mid-caps and small-caps leading the market higher. Outside of technology, the S&P's close at 1145 leaves it just five points shy of its 2010 (and post-GFC) high.
There is a clear move back into risk trading in the US at present, now that the Greek situation has been forgotten (or ignored). But this is not being reflected in a wholesale move into equities. Equities were just the place to be to pick up the bounce from the bottom. Outside of specific sector preferences such as technology, American investors are pouring into government and corporate debt. Government debt, at very low rates, provides the protection against that which may not yet have emerged post-GFC. Now that credit spreads have eased, corporates are issuing bonds in record numbers and investors are showing a preference for fixed interest coupons on relatively safe names rather than riskier equity and dividend bets.
There has been much concern of late that inflation fears, related to the US deficit, would push the US yield curve ever higher (it has been at record spreads lately). But as the Fed moves to end its quantitative easing, implying at least some of the printing presses are being shut down, faith is returning to investment in ten-year bonds which offer around 3.75% at present. Last night's auction of US$21bn of ten-years was three and a half times oversubscribed.
Longer dated bonds are at least popular domestically. Foreign central banks only picked up 35% of the offer compared to the 42% running average of recent months. So more and more America is lending money to itself.
The equity bulls see this scenario as bullish. The easing of GFC fear has not meant a return to “fools rush in” indiscriminate stock market gambling, but a more measured approach to balanced portfolios of cash, fixed interest and equity, with equity portfolios being carefully chosen. The non-equity portion has formed a buffer underneath general investment, such that as fears ease further and the US economy recovers more robustly then money will begin to flow out of “safer” fixed interest and into “riskier” equity once more. Thus there will not be just another boom-bust cycle building, but a solidly based bull market. So the story goes.
Adding weight to this argument is gold, which fell another US$14.00 to US$1105.40/oz last night. Gold has pulled back from another assault on US$1200 both as European fears fade, and because it just doesn't look like China is going to buy the other half of the IMF gold line on offer as many had assumed it would.
In the meantime, the US dollar is treading water at these levels, not keen to continue what all and sundry had assumed would be its secular decline because the euro is not going to rally while debt concerns linger. On the flipside, improving risk appetite means the US dollar is not much likely to rally either.
So the reflation trade has stalled somewhat, and once again base metals were mixed in London overnight. Nickel, nevertheless, fell 4%. Oil added US62c to US$82.09 on news that gasoline draw-downs were greater than expected last week.
The oil market also liked the news from China that Chinese exports had increased 45.7% year-on-year in February (that's exports of manufactured goods, not oil) albeit this figure was down 2.2% from January on a seasonally adjusted basis. Chinese imports increased 44.7%, up 6.3% from January (mostly raw materials).
Economists had expected US wholesale inventories to rise 0.2% last month but they fell 0.2% as sales increased 1.3%. This was taken as a positive, as it means more inventory restocking is needed.
Some heed has to be given to another big night for the likes of AIG, Fannie, Freddie and Citigroup last night. Citi is looking to issue some preferreds for the first time post-GFC (this market has been dead all that time) but realistically the sharp moves in financials represent short-covering ahead of an expected government ban on short-selling, itself ahead of the government unwinding its equity stakes.
The US dollar index continues to tread water, but that hasn't stopped the Aussie ticking quietly up. It was up to US$0.9143 last night and seems destined to continue higher as the RBA looks to raise rates and the Fed does not. By contrast, the ASX 200 has actually lagged the S&P 500 out of the Greek bottom.
The SPI overnight was up 20 points or 0.4%.
The Chinese data rolls in again big-time today, with monthly reads on investment, industrial production, retail sales and inflation. And its unemployment day in Australia.
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