The Overnight Report: September Surge

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By Greg Peel

The Dow rose 254 points or 2.5% while the S&P jumped 3.0% to 1080 and the Nasdaq also added 3.0%.

Well if the gods have determined September to be a down-month as tradition dictates, they're starting 250 Dow points behind. Last night's first-of-the-month on Wall Street provided the best introduction to September since 1998.

The fact that it was the first of the month cannot be discounted, given funds usually square the books at month-end and start afresh in the new month. And for big stock funds that usually means buying. But before we go into the reasons why Wall Street shot up so definitively last night, consider first that the Dow opened 150 points higher from the bell, held that for the first half hour, then jumped another 100 points at 10am and simply stayed there.

It was a different story on Friday night when we last saw a big rally. In that session, the Dow moved up steadily all day which tends to suggest short-covering as traders one by one bottled when it was clear the market wasn't about to retreat again. Last night was just a price-adjustment. There may well have been short-covering, but realistically the bids went in, the sellers were found, and then no one moved a muscle thereafter.

At 1.1bn turnover on the NYSE, volume was above the August average but below Tuesday's 1.4bn for the end of month. Both those numbers are historically light. Wall Street has been bogged down in an argument as to whether we have to go lower or whether we're already so gloomy the market is oversold, around about the Dow 10,000 mark. Last night was as if the referee had decided to move the scrum out of the mud puddle and onto dry ground where it can be packed once again for another engagement.

It must be said that Wall Street currently seems more trigger-happy to the upside. The first 150 points on the bell were a response to news from Australia and China. The fact Australia's June quarter GDP was 33% higher than expected and that China's manufacturing PMI ticked up when the world had feared a tick down – possibly into contraction territory – lit a bomb under the materials sector. (In US trade, BHP Billiton ((BHP)) closed up 6% and Rio Tinto ((RIO)) 7%.)

Then at 10am, the US manufacturing PMI was released. Again, Wall Street had feared that given the downward trend of recent data, the PMI might be in danger of slipping into contraction as well. But it also showed a tick up, and the floodgates opened.

And that, in a nutshell, is why the Dow was up 254 points last night, and why the S&P 500 surged 3%.

However, Wall Street was being nothing if not selective. The following are the global manufacturing PMI numbers for August as released over the past 48 hours, with the July number in brackets:

Japan 50.1 (52.8); Australia 51.7 (53.4); China official 51.7 (51.2); China HSBC unofficial 51.9 (49.4); UK 54.3 (56.9); eurozone 55.1 (56.7) and US 56.3 (55.5).

What we see is that it was only China and the US which posted accelerating manufacturing activity, while everywhere else showed decelerating growth. Indeed, the JP Morgan global aggregate PMI fell to 53.8 in August from 54.3 in July.

But is this a worry? Not necessarily. We must remember these are “rate of growth” numbers, not absolute numbers. They never just get bigger and bigger, and anything over 60 is a boom month. So while the world slowed its manufacturing activity in August, it's still growing. The rate of growth was at its lowest since November, but then we've had 15 consecutive monthly readings above 50 on the JP Morgan aggregate.

The two biggest economies we were worried about (which arguably now are THE two biggest economies) were the two to show increased growth. Both of them, perhaps, are simply indicating a soft landing post-stimulus. And if a couple of hours of commentary on CNBC is anything to go by (bearing in mind CNBC can have selective hearing), the bulls are back out in the paddock.

But hang on, wasn't there an ADP private sector jobs number out last night? Yes there was – it showed 10,000 jobs lost compared to an expectation of 13,000 gained. That's the first decline in the ADP number in 2010. If this was the only data release scheduled for last night, chances are we might have been down 250 points.

And the monthly vehicle sales numbers was the worst in 27 years. General Motors sales, for example, were down 25% in August year on year. But Wall Street did have reason to be circumspect about this particular result given August 2009 was the last month of “cash for clunkers” in which record sales were posted.

All other markets fell into line as one might expect on a 3% stock market up-day. Risk was back on the table as the US dollar index plunged 0.8% to 82.45, the Aussie risk indicator surged two cents to US$0.9111 over the space of 24 hours, and investors bailed out of bonds sending the ten-year yield up 11 basis points to 2.58%.

It was enough for some to call a bursting of the bond bubble as has been anticipated for some time, but realistically it seems we've simply found the support level at 2.5%. Just as Dow 10,000 appears to be offering so far unbreakable support.

Commodities responded as they might, with oil jumping 2.8% or US$3 to US$73.91 and base metals all posting 2-3% gains in London. Gold was the only wet blanket, given it fell US$3.30 to US$1244.40/oz despite the big drop in the dollar.

For most of 2010, the mathematical inverse relationship between dollar-gold and the dollar has been non-evident. The US PMI showed the US economy is not seeing “appreciable” weakness, which means the Fed will keep the QE2 tied up for a while yet.

The SPI Overnight added 71 points or 1.7% which was a pretty good effort given half of last night's gain on Wall Street was due to that which sent the ASX 200 up 2% yesterday.

So where are we left? Nowhere a lot different, except that the technical signals are beginning to weigh in favour of the “bottom forming” camp. Realistically, however, we need to see a bit of a volume pick-up on the NYSE before we can get too excited. This weekend is the Labor Day long weekend in the US which signals the end of the summer break. We need to see what the sun-tanned crowd will do next week, and we have a US jobs report on Friday.

We also have the July trade balance in Australia today. Exports were a big part of the June quarter GDP, and a big part of the resource sector's full and half-year earnings results. Has it carried on into the September quarter?

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