Daily Market Reports | Mar 19 2010
By Greg Peel
The Dow rose 45 points or 0.4% while the S&P fell less than a point to 1165 and the Nasdaq managed a 0.1% gain.
Investors were keen on the big-cap names among the thirty-stock Dow Jones Industrial Average last night but not so enamoured with the broader market. Posting its eighth straight up-day, the Dow is now at its highest level since October 2008. The S&P was flat in another session of minimal volume.
If we ignore the Dow, it's fair to say Wall Street was given little impetus in either direction last night.
Weekly new jobs claims fell by 5,000, which was encouraging. Also positive was the Philadelphia Fed economic activity index which rose from 17.6 last month to 18.9. Economists had expected a rise to only 18.0 in this zero-neutral measure.
But the news was tempered somewhat by the release of the Conference Board index of leading economic indicators. It rose only 0.1% to mark the smallest gain in eleven months. The index provides a prediction of economic activity three to six months ahead. Wall Street has been expecting only a modest pace of economic recovery, but now has more cause to wonder if indeed that recovery hasn't stalled.
One might say it was good news that the consumer price index for February was expected to show zero growth and that was exactly the case. The core CPI (ex food & energy) rose only 0.1%. These numbers follow on from yesterday's similarly weak PPI numbers which indicate inflation is remaining low in the US. This is good news for preventing a Fed rate rise anytime soon, but also reflects an economy struggling to recover.
Rumours nevertheless swept the Street last night that the Fed was intending to once again raise its discount rate ahead of any rise in its funds rate. The discount rate (the rate at which banks can apply to the Fed for emergency funding) was set at a 100 basis point premium over the funds rate prior to the GFC, but that premium was cut by the Fed as an emergency measure. It has since been returned to a 75 basis point premium, suggesting there's another 25 points to come as the Fed moves to exit its various monetary stimulus strategies.
The rumours caused a bit of a rush into the US dollar, but commentators pointed out that on the previous occasion the Fed had clearly telegraphed its intention to raise the discount rate so as not to destabilise the market. The central bank released its monthly policy statement on Tuesday but there was no mention of discount rates.
The US dollar was also boosted by a sharp fall in the euro. Did you think the Greek problem had gone away now? Well think again.
It has been oft noted in this Report that while the stronger EU members have pledged to bail out Greek debt if necessary, no detail has ever been offered. Germany and France have simply dismissed the lack of detail as a case of “it won't be necessary anyway so don't worry about it”. But the reality is it would seem, behind the scenes, that the governments of Germany and France have no intention of bailing out their profligate fellow member as it would potentially prove electoral suicide.
The usual course of action for an economy in trouble is to approach the International Monetary Fund for emergency support. That's what the IMF's there for. But any support package is complicated by the fact Greece shares a common currency with its eurozone colleagues. The IMF has denied any approach from Greece, but wire services last night suggested IMF representatives were “spotted” in Athens. A Greek spokesperson went on to suggest the prospect of EU support did not look good, and that the IMF was still an option.
This was enough to spook the forex market and send the euro tumbling once more. The US dollar index thus rose 0.7% to 80.28.
The fourth quarter US current account was released last night, and showed a widening in the deficit of 12.9%. This implies imports outpaced exports over the quarter.
While a rise in imports is evidence of a return of demand, the US has enough problems with its fiscal budget deficit without its trade balance blowing out once more as well. The economy needs exports to grow to overcome imports – a goal that should be boosted by a weaker US dollar. But the problems in Europe currently mean the dollar is no longer falling.
The stronger US dollar had the effect of sending base metals in London down around 1% each, except nickel which gained 1.5%. Oil fell US73c to US$82.20/bbl.
Gold, nevertheless, rose in defiance of the dollar as renewed Greek fears once again highlighted gold's safe haven status. Gold rose US$7.10 to US$1126.70/oz.
The Aussie slipped back to US$0.9213.
The SPI Overnight rose 8 points or 0.2%.
Kick-start your broomsticks – it's quadruple witching tonight.
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