Daily Market Reports | May 25 2010
By Greg Peel
The Dow fell 126 points or 1.2% while the S&P lost 1.3% to 1073 and the Nasdaq fell 0.7%.
Let's start with yesterday's market in Australia. Having staged a spectacular rebound on Friday that was likely part bargain hunting and part covering shorts ahead of the weekend, the ASX 200 opened timidly yesterday despite the late rally on Wall Street on Friday night. That it finished up 2% was largely to do with talk out of China, which provided some confidence for bargain hunters to really have a good look at the oversold resource and bank stocks.
US officials are in Beijing for talks with Hu Jintao, and high on the priority list is the pegged renminbi. Analysts are expecting some headway to be made on a timetable for renminbi revaluation, which would help the US reduce its trade deficit and also provide China with more purchasing power to buy Australian commodities.
Jintao was all sweetness and light, but reiterated that China would reform its currency regime in its own time. Nevertheless, markets took the talks as a positive and the Shanghai index rose 3.5%, providing the Australian market with some impetus.
One must, however, note three points: (1) this is all Hu has been saying for months; (2) China will not appear to respond directly to US pressure; and (3) China experts insist there will be no revaluation considered while euro instability remains.
Which brings us to last night's markets.
The euro fell in early European trade last night from its weekend level above US$1.25 back to US$1.2345, breaking the recent short-covering rally. Most analysts expect the euro to recover further as trading shorts square up ahead of currency intervention before a more secular decline recommences in earnest. But last night's trading reflected a new round of nervousness.
The Bank of Spain announced last night it had been forced to take control of regional savings bank CajaSur and appoint an administrator. CajaSur became the second Spanish regional bank to go under post-GFC, unable to overcome defaults following the crash of the Spanish property market. The bank was owned by the Roman Catholic Church. Obviously this new development – in which the sovereign debt issue is now impacting on the commercial banking sector – sparked a new round of fear.
But there are a couple of ways of looking at this.
One must appreciate that while it is European sovereigns which are in trouble, the whole “contagion” possibility comes not from an interlinking of sovereign exposures, but the interlinking of European commercial and investment banking exposures, being the conduits for European credit. If, for example, Greece is forced to restructure it debt, the echoes will be felt in the private banking sector directly, while sovereign contagion is more a case of “who's next”.
On that basis, one might look at CajaSur as possibly the tip of the iceberg, as the trickle that becomes the flood or, to use a Dennis Gartman analogy, there is never only one cockroach. That thought is certainly enough to instil fear.
Or, on a less ominous note, one might look at CajaSur as being an ultimate and inevitable victim of the bursting of the Spanish property bubble that had begun to occur before the GFC. The GFC was precipitated by the bursting of the US property bubble in 2006, yet the fall-out has quite a lag effect given the specific structuring of certain sub- and mid-prime mortgages. US delinquencies and defaults still continue to rise despite signs of improvement in the US housing market, and every week the FDIC is forced to close one of America's regional banks of which there are thousands. Fortunately the rate of those closures has begun to fall.
So one might suggest CajaSur's days were numbered even before the European crisis gathered steam, with rising credit spreads ultimately providing the final nail. But this is all just speculation from me.
Nevertheless, the euro fell last night and the US dollar thus rallied – up 1.3% to 86.54. The Aussie in turn fell back a cent to US$0.8231. But commodities are no longer attached at the hip to the dollar, in the converse sense, given euro movements are just as influential.
London base metals ignored the nervousness of the euro and continued their technical bounces last night, rising 1-4% across the board.
The buying came back into gold, just as most expected it would after the late buyers on the last rally had bailed, and likely with some impetus from the Spanish news. Gold was up US$15.30 to US$1192.30/oz.
Oil added US17c to US$70.21/bbl.
It was a choppy ride on Wall Street. The late Friday rally of 125 points in the Dow smacked very much of shorts squaring before the weekend, so from last night's opening bell the news from Spain was enough to have the Dow down 100 points again.
There were a couple of economic data releases to then contend with. Firstly, the Chicago Fed national activity index rose to 0.29 in May from 0.13 in April, being the highest jump since December 2006 and the third month in four the zero-neutral index has shown expansion.
Secondly, March existing home sales rose by 7.6% when economists were only expecting 4.7%. This seems great news, expecpt for two points. The US government's first home buyer stimulus expired at the end of April (the second such package, will there be a third?) so clearly the rush was on, and stronger sales did not overcome the rate of new listings, which sent inventories of existing homes for sale up by 11.5%.
Despite the mixed data and Spain, Wall Street still managed to claw its way back to the flat-line by noon before drifting again. At 3.40pm the Dow was down only 47. A final wave of selling, concentrated in financial stocks, saw the Dow close at its lows.
What to make of this late move, compared to Friday's late move? Possibly Friday's bargain-hunters lost faith when a rally did not eventuate, and bottled at the death. But interestingly, the VIX volatility index fell last night from 40 to 38 – not the sort of move you'd associate with increased nervousness and panic selling.
It's a bit hard to read Wall Street at present other than to say everyone remains on a knife-edge – not wishing to get caught out holding longs if we tank again but also not wishing to miss a rebound. The SPI Overnight fell 70 points or 1.7% in sympathy with the late Wall Street close, but this seems a bit overdone in the context of the last two trading sessions in Australia. Commodity prices were strong last night.
It was also interesting that the Nasdaq fell last night by less than the other two indices. The higher beta tech-loaded index (tech companies export a lot to Europe) usually outperforms on both the upside and downside in any given move in uncertain times, but just as the VIX indicated less volatility last night, so too did the Nasdaq.
Strange days indeed.
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