Daily Market Reports | Jun 30 2010
By Greg Peel
The Dow fell 268 points or 2.7% while the S&P dropped 3.1% to 1041 and the Nasdaq fell 3.9%.
Wall Street has been building up to this point. A fortnight ago the S&P 500 broke back up above its 200-day moving average as the world began to feel the situation in Europe was under control and that China may not move so aggressively to slow its economy in light of Europe's woes. But the break-up lacked conviction, volume on up days was thin, and the S&P failed to hold the 200 MA.
While dips in the market have brought in some buying in the interim, concern has been growing over the likelihood of a more pronounced return to global slowdown. Last week the Fed downgraded its outlook for the US economy in light of Europe. On the weekend the G8 chose a policy route of budget cuts and tax increases which brought back ghosts of the Great Depression. The new buzzword is deflation (not that it ever really went away) and stocks do not perform well in a deflationary environment. If consumers lose their bottle once more, corporate earnings growth will be difficult to achieve.
The walls began to crack during yesterday's Asian session. The ASX 200 tried to move higher early, but it reversed on news out of China. The Conference Board had previously suggested its leading economic index for China had grown by 1.7% in April. But yesterday the private group revised that figure down to growth of only 0.3%, citing an earlier calculation error.
That was enough to spook China, sending the Shanghai index down 4.3%. Over in Europe, attention turned to Thursday's scheduled rollover of European bank debt. One year ago the ECB offered 1% emergency loans to European banks and Thursday sees that emergency measure expire. There is no intention to renew the one-year facility given the ECB has since introduced a three-month emergency loan facility in light of the 2010 sovereign debt crisis.
There are 443bn euros worth of ECB one-year loans out to European banks, and those banks now have to either try to raise finance in the private sector all at the same time, or take on an ECB three-month loan instead. Spanish banks have been lobbying the ECB to act to cushion the blow of such a large rollover. In typical fashion, the ECB is unmoved. It will probably move only after there is a funding disaster, if that is to be the case.
So Wall Street had the jitters before the opening bell, and the mood did not improve when the Conference Board released its US consumer confidence measure for June. It fell to 52.9 from a reading of 62.7 in May, the lowest level since March. The consumer confidence rollover saw the Dow plunge over 200 points from the open. It held that level most of the day before the inevitable last hour selling wave, which saw the Dow down 327 points at 3.30pm.
More ominously, the S&P broad market index hit 1035. A break of 1040 is technically very bearish, as it confirms a head-and-shoulders pattern on the charts. However with just ten minutes to go, a sudden buying wave rolled in to push the S&P to a close of 1041.
The closing level has market opinion split. The optimists say the fact the S&P held 1040 is positive. The pessimists say that this is the fourth significant bottom of 2010, and the lowest for the year. Triple bottoms are usually positive. Quadruple bottoms are rare. The pessimists see a break of 1040 and a sharp move to the downside, at least to under 1000.
The flight to quality was on in earnest again last night. This means sell risk assets and buy safety. Sell stocks and commodities, unwind carry trades, and buy US Treasuries and stock index put options.
The US benchmark ten-year bond yield fell seven basis points to 2.95% – the lowest level in over a year. The two-year bond yield fell to 0.6% – the lowest level in history. The US dollar index rose 0.5% to 86.16 as the euro slipped again. The dollar's rise was tempered only by carry trade unwinding pushing up the yen. The risk indicator Aussie dollar plunged nearly two and a half cents to US$0.8474.
The VIX volatility index on the S&P 500 jumped 18% to 34.13.
Gold is another safe haven, but gold in US dollar terms has to battle against a stronger dollar, and also battle against traders selling gold to fund stock margins. So gold managed only a US$2.20 rise to US$1240.80/oz.
Real commodities were trashed. Oil fell US$2.31 or 3% to US$75.94/bbl while in London base metals fell 4-7%.
Lost in the wash was the US Case-Shiller 20-city house price index for April which showed a significant jump of 3.8% – the first increase in seven months. But while this might seem a silver lining, the truth is the government's tax credit program expired in April and prices simply reflected a last minute rush, not a change of trend.
So here we are again, once more on the edge of a precipice. The situation is complicated by today being end of the quarter, end of the half, and in Australia's case end of the financial year. It is further complicated by Friday's upcoming US jobs report, which economists are finding difficult to estimate given the impact of the census. Thursday night will also be telling with respect to European bank debt.
Shortly the second quarter earnings season will begin in the US. There is still a good deal of optimism on earnings amongst one side of Wall Street. Will there be some good results to allay the growing fears of a double-dip recession?
The SPI Overnight was down 93 points or 2.1%.
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