Daily Market Reports | May 28 2010
By Greg Peel
The Dow rose 284 points or 2.9%, lagging a 3.3% jump on the S&P to 1103 and a 3.7% surge in the Nasdaq.
The Dow has previously rallied over 200 points in a session in May, but not into the green. It has only recovered from early session lows. Indeed, there have been few “one way street” days in either direction lately, with late sell-offs of buy-ups the norm in a market wracked with uncertainty. And the Dow has not yet put together two net up-days in the whole month.
So a near 300 point rally, with barely an intra-day stumble, and a close on the highs, is a thing of beauty indeed. But it's still only a one-in-a-row rally.
So it's not necessarily time yet to breathe a big sigh and say thank God that's over. But it's a good start. There has clearly been pent up demand building on Wall Street these past few sessions, and a feeling that it's time to jump back into the risk trade at oversold levels. The euro-yen has long been considered the global risk indicator, but it was up only a mere 0.3% last night. However in more recent times, the world, and the US in particular, has come to favour a new risk indicator – the Aussie dollar. From this time yesterday to today, the Aussie has jumped over three cents, or 3.8%, to US$0.8519. Those used to big moves in volatile stock prices may not see 3.8% as being a big deal, but in currency markets that is a huge move.
The reason the euro-yen is seen as a risk indicator is because firstly it takes the reserve currency out of the equation. It then combines an indicator of the “other” major global economy – the eurozone – with the carry trade indicator – the yen – in a double-risk combination (Yen down and euro up means risk appetite, yen up and euro down means risk aversion).
But increasingly, the Aussie dollar is playing the risk indicator role. Foreign investors, in the US in particular, may shy away from making their emerging market investments at the source (China, India etc) given the immaturity and volatility of those markets, the sovereign risk inherent, particularly when one plays capitalist with a communist regime, and the uncertainty of underdeveloped capital markets. But when China and India are on the move, Australia benefits. Australia provides none of the problems above as a correlated, safe, proxy emerging market investment.
But this is also what makes the Aussie increasingly more volatile now, because US investors are playing both stocks and the currency in the same direction. It's either double win or double lose. Nevertheless, Milo Minderbinder* would be happy to say right now what's good for the Aussie is good for America.
Yesterday I noted the folly of the Wall Street response to an unfounded news article implying China was looking to dump its significant euro holdings. (See yesterday's Overnight Report). And sure enough, late yesterday the Chinese State Administration of Foreign Exchange (SAFE) issued a statement declaring any suggestion that China was looking to sell the euro was “groundless”.
SAFE further noted it supported the measures being taken by the EU and IMF to stabilise the eurozone and declared the eurozone “one of the most important investment markets” and a key component of China's diversified investment portfolio. And that was all the world needed to hear, even if it was what the world had assumed anyway.
And so the euro jumped from under US$1.22 last night to over US$1.23, sending the US dollar index down 1.2% to 86.29. The London stock market jumped 3%, as did the markets of Germany, France, Portugal and Spain, with Italy jumping 4.5%.
And that's really all you need to know about last night's rally on Wall Street.
As I have noted recently, US economic data releases have been lost in the shadows of global volatility to a great extent of late. Last night economists had expected US first quarter GDP to be revised up from 3.2% growth to 3.4% but instead it was revised down to 3.0%. First quarter personal consumption was revised down from 3.6% to 3.5%.
It was an unfortunate day for the Treasury to try to sell US$31bn of seven-year notes given the return of the risk trade, but demand was nevertheless very solid. Foreign central banks bought 51% compared to a 48% average. However the “flight out of quality” saw the yield on the benchmark ten-year surge 17 basis points to 3.36%. That, too, is a huge move.
There was no flight out of gold however. Whether or not risk has diminished, a positive solution in Europe is still dependent on those hardworking printing presses and so gold still has reason to be bid. It added US$1.40 to US$1212.00/oz last night.
After a solid session on Wednesday night, oil rocketed up last night by over 4%, or US$3.04, to US$74.55/bbl. It was not just about a weaker US dollar because that relationship is no longer strict with the euro calling the shots. It was just a relief rally on the news out of China. But there are other forces at work in oil. The good news is it looks like BP may this time be winning the battle in trying to plug the Gulf oil spill, but at the same time President Obama is calling for a moratorium on new Gulfs rigs and a possible shut down of other existing rigs until the reasons behind the spill are fully understood.
London base metals have mostly been doing their own thing of late, so after big rallies on Wednesday last night was a bit more tepid, with gains around 1% across the board.
After a good session yesterday (note how Australia has become more of a leader and less of a follower now) the SPI Overnight added another 65 points or 1.5%.
Is this it? Is it all over? Well one rally does not a northern summer make. Two rallies would be better but we still have to move from “oversold” to simply “sold” before the next move is clear. We need to see real action from the EU, not just talk, a possible word out of China that monetary policy is on hold (although we may just hear nothing rather in place of another tightening announcement), and we need to see what RSPT 2.0 might look like.
But it's a start.
*Refer to Joseph Heller's Catch-22.
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