Daily Market Reports | May 27 2010
By Greg Peel
The Dow closed down 69 points or 0.7% to 9974 – its first close below 10,000 since February, when the Greek story first spooked markets. The S&P lost 0.6% to 1067 and the Nasdaq lost 0.7%. The February closing low in the S&P was 1056.
We all know stock markets go up by the stairs and down by the elevator, but it's harrowing stuff when such trips are made in one day, and most days. Wall Street appears to be making a concerted effort to consolidate and attempt build back up from a base, but with market nervousness still piqued, any little rumour has traders rushing off to the sidelines once more.
Following its big turnaround on Tuesday night, Wall Street kicked on with it early last night as most hoped it would. The Dow was up 136 points at 11am as the euro held relatively steady. But then a Wall Street Journal report came out suggesting Spain's very large BBVA bank could face difficulty in financing US$1bn in debt. At that point the euro began to sag once more.
Whether or not the rumour is true is irrelevant. Such talk is self-fulfilling, in that bank counter parties will elect not to challenge the rumour, but rather play it safe instead. That's basically how Lehman went down. The LIBOR rate continues to tick up suggesting global banks are becoming more nervous about lending money within Europe, and all the while the EU yet again dithers. While many expect the level at which the EU intends to intervene to support the euro is lower than here, we are still waiting for straggling members to pass required legislation through their parliaments in order to ratify the E440bn EU contribution to the stability fund.
One such straggler is Italy, despite Italy being set to be a beneficiary rather than a contributor. But last night Italy did announceme budget cuts as part of its own austerity push, and immediately the country's biggest union threatened to strike.
While the Libor rate continues to tick up, it is interesting to note the Fed's emergency currency swap facility is not being heavily accessed. Given European banks have dollar-denominated as well as euro-denominated debt obligations, which become more onerous as the euro continues to fall, the Fed has offered to swap dollars for euro on a swap rate with a penalty of 100 basis points above market. The Fed has only recently re-opened this facility following a similar move in the 2008 crisis. In 2008, the Fed had swapped US$583bn by December. So far in 2010, only US$9bn has been accessed. This either means European banks are not (yet) desperate or that the 100 point penalty is just too high. Another Wall Street Journal article last night suggested the Fed may well cut this penalty rate before it's too late.
So here we sit with the ECB madly swapping euro-junk for short-term low interest rate loans, a E760bn euro stability fund yet to be implemented, and a Fed armed with emergency dollars if required. But as each day of lingering inaction passes, markets around the world continue to jump at shadows.
The Spanish bank story may have set Wall Street back on its heels last night, but it was a London Financial Times story which ultimately sent the euro back to under US$1.22 and Wall Street rushing out of stocks at the death. The FT story suggested China was in talks with European central bankers regarding what to do about the large tranche of euro debt it is holding. The assumption was China was looking to sell out, and that, of course, would kill the euro completely.
While one can appreciate the nervousness, and the lack of desire to be brave, this was a naïve response. Firstly, the veracity of the FT's claim was questioned given China never tells anyone what its doing on a monetary policy basis until it wants to and it never leaks (on pain of death). Secondly, of course China is worried about, and no doubt discussing, its euro holdings. So is everyone else. And thirdly, China was mighty angry with the US back in early 2008 as the value of its US bond holdings were crashing and there has been speculation ever since about what catastrophe would befall if China decided to sell out of its US debt. China can't sell out of its US dollar debt, and hasn't, because the losses it would take in doing so would assure its own destruction. Now just substitute the word “euro” for “dollar” and you'll find no difference.
That doesn't mean there's nothing at all to worry about. This market remains on a knife-edge and will be on it for some time yet.
The fall in the euro sent the US dollar index up almost another full point last night to 87.34. However, underlying the dollar's strength were more positive US economic data.
New durable goods orders rose by 2.9% in April against a 2.5% expectation to mark the fourth increase in five months. Nevertheless, if you remove the volatile and substantial new aircraft order segment remaining orders were actually down 1.0% for the first drop in three months. But this is a volatile piece of data and needs to be considered in terms of its trend rather than each month's result.
New home sales jumped by 14.8% in April to 504,000 compared to a 425,000 expectation from economists. The surge clearly reflects the end-April expiry of the US government's first home buyer stimulus, but then economists knew that.
The US Treasury auctioned US$40bn of five-year notes last night and despite moderate demand, the resultant yield of 2.13% was about what traders had expected. Foreign central banks bought only 40% compared to a 45% running average. Given the world hasn't rushed into either the fives last night or the twos the night before would suggest that the world is not yet panicked enough to buy more US debt at these low yields.
The oil market took heart from the strong US data, and from news gasoline demand had picked up and crude inventories at the Cushing hub had ticked down. The build-up at Cushing – the official delivery point for benchmark West Texas Intermediate – has been most instrumental in forcing the front month WTI future not only down, but down to a big discount to both later months and other benchmark oils (such as Brent). Oil bounced back 4% or US$2.76 last night to US$71.51/bbl.
Traders on the London Metals Exchange are currently scratching their heads in disbelief as speculators rush out of base metals one day and back into them the next with diminishing levels of rhyme or reason. One presumes “real” metal traders are just sitting on the sidelines watching the game with a pint of ale and a pork pie. Last night was a buying day, spurred on by solid US data and all metals were up 1-3%. But again, the LME closed before the final sell-off on Wall Street.
With the skittish selling now washed out of the gold market, and the re-take of the US$1200 mark, gold is quietly pushing up again as well it might, rising US$9.40 to US$1210.60/oz last night.
It was a down night for the Aussie roller-coaster, resulting in a 0.9 of a cent fall to US$0.8207 over 24 hours.
It was an uninspiring day on the Australian market yesterday as the ASX 200 struggled to fight back from Tuesday's rout. But last night the SPI Overnight finished down only 6 points.
Keep an eye out for the important first quarter capital expenditure numbers today.
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