Daily Market Reports | Jun 23 2010
By Greg Peel
The Dow fell 148 points or 1.4% while the S&P lost 1.6% to 1095 and the Nasdaq fell 1.2%.
Hello again. Thanks to my colleague Rudi for filling in on this report while I've been taking a break.
Activity in the markets in my absence and last night can be summed up by the following chart:
Clearly the 200-day moving average of the the US broad market S&P500 index has been a significant technical factor these past couple of months. The index crunched through in May and failed twice to penetrate on rallies before finally concerns began to lift to provide the break-up a couple of weeks ago.
Impetus for that break-up included a gradual diminishing of European concerns, centred around a clear movement towards fiscal austerity and a growing faith in EU/ECB/IMF rescue measures. In the meantime, US economic news had been mostly positive with the exception of jobs and most recently indications that China was moving to revalue the renminbi have provided support. And supposed upcoming concessions on the RSPT have provided some hope for the local mining sector.
But while the S&P had managed to break back up above the moving average, it became a case of “what now?” While fear had subsided (as indicated by the VIX falling back to the low 20s) there was nevertheless no real impetus to push ahead with any gusto. Initial enthusiasm over European austerity measures have given way to the realisation of the drag such measures will have on European, and thus global, economic growth. And initial enthusiasm over Chinese currency revaluation has given way to the realisation that a simple widening of the renminbi peg range is not the sort of 5-10% appreciation the market has been hoping for. Clearly China is going to play it softly-softly as always.
And then there is the problem of lingering “double-dip” fears in the US. While the US manufacturing sector and other indicators have continued to look encouraging, the employment situation has not. With that in mind, Wall Street was not thrilled to learn last night that while the average house price was up 2.7% annually last month, sales of existing homes fell 2.2%. Economists had expected a rise of 6.0%.
The reason such a solid rise was expected is that May represents the last month of impact of the government's extended home buyer tax credit program. That program expired end-April and the existing sales number measures contracts closed, such that buyers would have signed up in April to reach settlement in May, thus still being eligible for the credit. In other words, economists were expecting a last-rush jump in sales in the order of 6%, and thus a fall of 2.2% was very disappointing. The numbers were not anticipated to turn ugly until at least June.
Thus in the US we are back to the overriding problem of house sales drying up when continuing high unemployment is affecting an ongoing increase in mortgage foreclosures. We are currently in the middle of the final big wave of subprime mortgage resets – representing the most ludicrous of all mortgages written in early 2007 – and once again banks are being swamped with “jingle mail”.
But there weren't many players on Wall Street last night, and initially the market's response to the housing number was muted. Counteracting was news the court had overruled the US government's moratorium on deep-sea oil drilling, implying workers could be back on the job and companies in the exploration/service game could be saved. However the Obama administration very quickly indicated it would appeal the ruling, sending the energy sector back into limbo.
And that was enough. On very thin volume, not assisted by the fact we are now officially in the northern summer, the S&P500 dipped under its 200-day moving average just after 2pm. It then fell into a vacuum, resulting in another break down through the 1100 mark. The flight to quality was back on.
The benchmark ten-year bond yield fell 8 basis points to 3.16% last night as solid demand for a US$40bn auction of two-year notes saw a settlement yield close the the lowest in history. The yield of 0.69% is second only to December 2008's settlement of 0.62%.
Gold rallied US$6.80 to US$1238.60/oz despite a slightly stronger US dollar index at 86.14. The dollar's rally was muted by a positive response from the pound to tough budget measures announced in the UK (notwithstanding such measures are causing more general global economic despondency), while the euro slipped after ratings agency Fitch downgraded leading French bank BNP Paribas. The downgrade reflected a loss of banking business in a more austere Europe.
Oil was unsurprisingly volatile given the to and fro of news in the session as well as it being July contract expiry, and the July contract expired down US61c to US$77.21/bbl. Volume was also thin on the LME where a lack of any conviction saw base metals close slightly positive after initially dropping.
The Aussie risk indicator nevertheless slipped on 0.4 of a cent to US$0.8723 but the VIX volatility index in the US jumped 9% to 27.
The SPI Overnight was down 45 points or 1.0%.
It was not a particularly positive session to return to.
[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]
