Daily Market Reports | May 18 2010
By Greg Peel
The Dow closed up 5 points while the S&P managed 0.1% to 1136 and the Nasdaq added 0.3%.
The northern hemisphere session opened like any other of recent times last night – with euro selling. There was a certainly inevitability about the euro reaching US$1.2233, its lowest level since April 2006. Prior to the collapse of Lehman and the GFC, when the subprime crisis was considered simply an American thing, the euro traded at US$1.60. It is now been devalued by 24%.
There was mixed news for Wall Street to consider in the morning session. Monday's Asian session had been a wipe-out, with Japan down 2% and China 5% and a capitulation sell-off in Australia which saw a 3% fall, no doubt driven by weaker commodity prices and an exit of US investment. The Aussie has fallen a cent to US$0.8775.
Major European stock markets, however, had opened stronger before drifting back to be flat on the day.
On the economic data front, The Empire State (NY) manufacturing index fell from its lofty reading of 31.9 in April to 19.1 in May. That seems like a big fall but on this zero-neutral index it means only a slowing in the pace of expansion. The NAHB housing market sentiment index rose from 19 to a 33-month high of 22. While that sounds like great news, the peak in the index was 72 in 2005 and it has only ever been under 22 twice in 25 years (it reached 8 in the recent trough).
There was a big jump in long-term Treasury international capital (TIC) flows in March, to positive US$140.5bn from positive US$47.1bn in February. Economists had expected a little over US$50bn. While one might argue the European situation has clearly sparked a flight to (US) quality, March was a month in which Wall Street was rallying toward its peak as European fears temporarily subsided. TIC flows include bonds and equity, so clearly the stock market was popular with foreigners. But China was also a net buyer of US bonds in March for the first time since September.
It is thus not surprising the US dollar index shot up to 87 by noon, given the above data and further euro weakness. However at noon, a funny thing happened.
Without any apparent impetus, the euro turned. It ultimately rallied back to US$1.2396. Wall Street currently has all eyes glued to the euro screen, so noon also saw a turn in the stock market and a rally back to square. The dollar index fell back to 86.15 which was sightly down on the session.
Has the euro collapse finally exhausted itself? One half-session does not a summer make. The turnaround quite possibly represented shorts deciding to take profits ahead of the outcome of the eurozone leaders meeting being held in Brussels last night, albeit not much new news was expected to emanate from the meeting.
Indeed, news has since flowed from that meeting, albeit from well after noon New York time. Germany is pushing for stricter budget disciplines to be written into the EU rules, similar to those written into the German constitution, but the idea received little support in practice. A suggestion was made that collective eurozone members should have the power to force budget changes upon a recalcitrant member during the normal course of business (as opposed to right now, where austerity measures are simply a trade-off for emergency funding) but neither Germany nor France liked that idea.
And therein lies one of the most fundamental problems of the common currency – a problem which may yet see the euro disbanded. There may be a common currency and a specific eurozone central bank, but there are still sixteen individual members, parliaments and central banks bound only by an EU “stability and growth pact”. One is reminded of a teacher in this day and age who has trouble controlling an unruly classroom because she no longer has any disciplinary powers.
There was also talk in the meeting of how the emergency E440bn currency stabilisation fund might actually work. The suggestion is to set up a special purpose vehicle (SPV), but then how is the money raised to fund it? One suggestion was the SPV could issue low interest rate bonds to the market backed by individual government guarantees. But again, Europe has so far made only pledges and not settled on any detail. That, and ongoing violence in Greece, is what has the world still worried.
There may have been a turnaround in the euro against the dollar at noon, and a bounce on Wall Street, but the euro still finished down 1.5% against the yen as carry trades continue to be unwound. The euro-yen is seen as the definitive global risk indicator. And on the London Metals Exchange, there was nothing but carnage.
Note that FNArena picks up the very last “kerbside” settlement price for LME metals, which is 7pm London time or 2pm New York time. [Other media outlets, such as the ABC news, pick up earlier settlements]. So the LME was well aware of the bounce in the euro and Wall Street when it ultimately sold down nickel by 4%, aluminium by 5%, copper by 6%, zinc by 8% and lead by 9%. Technical sell-triggers set off stop-loss orders and and it was on for young and old amongst the speculators.
The bounce in the euro had gold down US$7.30 to US$1224.10/oz, but gold had already been slightly weaker even as the euro initially fell. Silver lost 2%.
Oil's woes continued, with another 2% fall or US$1.53 to US$70.08/bbl. Oil has now fallen over 20%. However, there is an important point to note about oil at the moment.
There is currently a big disparity between the benchmark West Texas Intermediate crude futures contract and the “other” benchmark – Brent crude (North Sea) contract – which closed last night at US$80.11/bbl for the same June delivery. There is also a huge contango on the WTI futures curve, such that the September delivery contract is trading at US$76.17/bbl. Oil traders are scratching their heads to remember when the curve was quite that steep.
The reason is that the delivery point for WTI is in Cushing, Oklahoma, and currently the storage facilities at the “hub” are bursting with excess inventory. So the spot price being paid for oil at Cushing has collapsed. The same problem is not occurring elsewhere (Brent, Dubai, Singapore Tapis etc) leaving WTI as a global outlier at present. And the steep rise in WTI futures prices into the latter months suggests the inventory overflow will only be temporary.
[It also means Australian petrol prices will not come down by much.]
So what we had last night was a lot of mixed fortune. Following the blood-on-Bridge-Street session yesterday in Australia, the SPI Overnight is up 29 points or 0.7%, ignoring London metals.
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