Daily Market Reports | Aug 13 2010
By Greg Peel
The Dow closed down 58 points or 0.6% while the S&P lost 0.5% to 1083 and the Nasdaq fell 0.8%.
The Dow was down 110 points from the opening bell to carry on this week's theme of retreat from risk, spurred on by a weak outlook from Cisco and another jump in weekly new jobless claims.
Cisco, which announced after the market on Wednesday, missed slightly on revenue but also provided a fairly glum outlook for the fourth quarter. The market had held much higher hopes for the IT leader given the rollout of its new and more efficient systems software which Wall Street had seen as “must haves”. But companies are reluctant to spend even in the critical realm of up to date IT, and sales results and guidance disappointed. Cisco shares fell 10% last night.
I have noted often enough in this report that weekly new jobless claims is a volatile number that traders should be wary of reacting to too definitively. Yet when the number comes out at 2,000 new claims for the week compared to expectations of a 19,000 reduction, a nervous market has little choice but to react. Earlier in the year weekly jobless claims began slowly to trend down towards the 400,000 threshold seen as the point at which unemployment can actually begin to fall. But in the last couple of months they've been trending up again, and last night's figure of 484,000 is the highest level since February.
But the economic weakness story is not just US-based, it's global. Yesterday Japan announced a fall in monthly industrial production of 1.1% to mark the first fall in four months. Eurozone economists had expected a 0.6% jump in monthly IP but the result was a 0.1% fall – the first in three months. Ominously for the eurozone, the story was not just about the stricken Mediterranean states. Germany and France both logged falls.
By contrast, India (the forgotten emerging market) marked a 7.1% rise in IP. This sounds fabulous, but for the fact it's the first result in eight months that was not in double digits, which reflects the rolling off of earlier government stimulus.
The problem for all the major exporting regions, be it the US, Japan, Germany/France or China, is that consumers have retreated from debt-driven consumption, be they household buyers of televisions or corporate buyers of heavy machinery. The market for goods is now much smaller than it was pre-GFC, which means each region is now in stiff competition with every other. And it all comes down to currency.
While the Obama Administration has always trotted out the “strong dollar” mantra, economists are fully aware that behind the scenes the Treasury is encouraging a gradual dollar depreciation in order to boost exports and curb imports, and thus reduce the trade deficit. It was working nicely in 2009, then along came the European crisis to push the euro lower and the dollar higher.
Europe was clearly in trouble, except that the plunge in the euro meant greater export competitiveness for the likes of Germany and France. Hence recent economic data out of the eurozone have not been too bad. But then that meant a euro on the rise once more, and perhaps this drop in the June IP numbers reflects that.
Japan, on the other hand, is forever stuck in a “rock and a hard place” cycle. Having been unable to escape from more than a decade of deflation, Japanese exports have at least been boosted by a weak yen, which in turn was fuelled by the yen being the carry trade currency of choice (borrow yen at near zero rates, invest elsewhere). A large proportion of that carry trade came out of the US, but now the US has its own near-zero rates. Traders have unwound carry trades out of fear since the GFC, but if they put them back on again now they use dollars instead. The yen is now at a 15-year high.
So critical has the yen become for Japan that indications are the Bank of Japan is set to act to ease the currency's appreciation for the sake of exports.
In the meantime, China sails along with a severely undervalued currency pegged to the dollar, and India's controlled float also means the rupee is artificially undervalued.
All of these regions are struggling to sell exports into a smaller market. But it is zero sum game in which one day one currency is favourable, only to be replaced down the track by a different currency, and so goes the ebb and flow. Only when the consumer returns can all regions benefit rather than cannibalise.
After a big jump on Wednesday night, the US dollar was again slightly higher last night (82.59) as traders sold the yen in anticipation of BoJ intervention and sold the euro on the weak IP data. The Aussie nevertheless managed to claw back a few points to US$0.8959, but the real story last night was in gold.
I suggested yesterday that gold was poised. Either it was going to try for new highs again on expectations of further Fed easing or fall back on renewed dollar strength. Well last night it went the former, with jobless claims claimed as the trigger. Gold jumped US$15.60 to US$1213.50/oz.
But back to stocks for a moment.
Having fallen 110 points from the opening bell, Wall Street found some buyers and thus the drop was ultimately reduced to 58 points. But once again, volume was anaemic. There are very few “real” players in the market at present, and the following two graphs might suggest that the only players are traders simply playing the technicals.
You'll note in this three-month graph of the S&P 500 that all through June and into July, the 200-day moving average formed a ceiling, and that in mid-July even the 50-day proved a tough nut to crack. But the 200-day was finally breached in late July sparking some enthusiasm, until the index ran smack into a wall at the 100-day moving average.
This week has seen a big sell-off, but last night we managed to return from the brink. Why? Because the S&P fell through the 50-day and there found technical support. At 1183, the index has closed right on the 50-day.
There's your range at present, while most investors are on a beach – in between the 50 and the 100. But if we now zoom out to a six-month chart we see an interesting development.
Call me old-fashioned, but I'd say all that range-trading is doing is forcing all three moving averages to head towards convergence. What happens then? Well, if the 50-day crosses up over the 200-day, it is in theory a “golden cross” which signals a new bull market. But we had the opposite “death cross” only last month, so really no definitive trend can be read here. And that convergence looks like being achieved in the scariest months of the year for equities – September-October. What will the technicians do then?
Speaking of range-trading, oil's still very much stuck in one as well. A bit of positivity recently took us above the US$80 mark, while earlier negativity took us under the US$70 mark. Having breached US$80 it seems we're back on our way to US$70 again, until the next mini-cycle. Last night oil fell another US$2.28 to US$75.74/bbl.
Base metals were less definitive, taking a breather in London after a couple of weak sessions.
The “safe haven” play of US Treasuries also took a slight breather last night, with the ten-year yield rising 6 basis points to 2.75%. But last night the Treasury also auctioned US$16bn of thirty-year bonds. The auction was once again well bid, but you'd think thirty-years are something foreigners would shy away from given US deficit fears and the fact the Fed is now rolling back to shorter date purchases. But no – foreign central banks bought 46% compared to a 38% running average.
The SPI Overnight fell 27 points or 0.6%.
It's a big data night in the other half of the world tonight, with the eurozone releasing its first estimate of second quarter GDP (0.5% to 1.0% growth expected) and the US releasing retail sales, business inventories, the CPI and a consumer confidence survey.
It might be a good lunch day for the Battered of Bond Street today however, given there are no economic releases or ASX 200 earnings reports.
Oh, and it's Friday the Thirteenth.
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