Daily Market Reports | Sep 09 2010
By Greg Peel
The Dow closed up 46 points or 0.6% while the S&P gained 0.6% to 1098 and the Nasdaq added 0.9%.
The Bank of Canada raised its cash rate last night by 25 basis points, catching half of the market out, and signaled more rate hikes to come. One may wonder why the BoC is so hawkish at a time when the RBA is firmly on hold given global uncertainty, and knowing Canada and Australia are lookalikes in many respects. But the hike took Canada's cash rate to only 1% compared to the RBA's 4.5%, reflecting the vast majority of Canadian exports which travel no further than south of the border.
Nevertheless, it is of some comfort that the BoC is now confident enough to do so at a time when uncertainty remains over the state of the US economy and European debt fears begin to simmer once more. The central bank cited strong growth in consumption and business investment, the latter of which is still lacklustre in Australia outside of the obvious sector.
On the matter of Europe, Tuesday night's fears gave way to relief last night when Portugal received strong demand for for an E1bn auction of three and ten-year government bonds. The result allowed the euro to regain some of Tuesday's losses sparked by questions over the efficacy of earlier European bank stress tests.
It was this news in particular which had the Dow up 88 points by late morning, before slipping back on the release of the Fed Beige Book. This anecdotal survey of activity in the twelve Fed regions showed “widespread signs of deceleration compared with preceding [monthly] periods”.
The Fed noted the agriculture and manufacturing sectors held up better than others, but weakness was most notable in housing and construction. While the wind came out of Wall Street's sails somewhat on the Beige Book release, it's hardly a scoop.
One must also remember that recessions are largely psychological, which is why so much emphasis is placed on business and consumer sentiment measures. If everyone keeps telling the small business owner there's going to be a double-dip, he will back off on orders and hiring and look to batten down the hatches where possible. His customers will elect to put off purchases. Next thing you know…
On the matter of how to prevent the double-dip that will likely occur if everyone says it's going to, President Obama last night finally provided some colour to his intended new fiscal stimulus measures.
Obama reiterated his plans to pump money into infrastructure, but we already knew that. Indeed, the “infrastructure bank” has actually been in place for quite some time, leading many commentators to wonder what it's been doing if these announcements are supposedly new policy. The President also outlined tax breaks for R&D, which had already been flagged. And he ratified what most had expected – that the Bush tax cuts would be extended, but only for those earning less than US$250,000.
Such income is earned by only 2% of Americans, but Obama stated simply that the budget could not afford the US$700bn in lost tax were they to continue at the lower tax rate. Incidentally, the 2% will see their tax rates rise from 35% to 39%.
What was a new policy is that Obama is offering a 100% tax deduction and immediate depreciation on plant & equipment. The only problem is, it's only good for US-made P&E. Did someone say protectionism? Germany would be fuming.
When it was all said and done, the Obama announcements had no visible impact on Wall Street.
There was more action over in the bond market. Tuesday's European fears had sent bond prices rising once more after looking like they were set for a decent pullback, so the Portuguese news ensured the ten-year yield rallied back 5 basis points to 2.65% last night. The sellers had to fight strong demand for the Treasury's auction of US$21bn of ten-years notes. The settlement yield of 2.67% was the lowest since January 2009, and foreign central banks bought a whopping 54% compared to running average of only 40%.
With Europe still showing signs of the jitters, clearly the US is again the only place safe enough to park one's surpluses. The locals, however, are clearly backing off, with US bond resellers buying only 7%, down from 14%. And it's little wonder. With yields so low and fixed interest demand so high, US corporations are getting on the band wagon.
Last night saw the busiest session of corporate bond issuance in seven months and the third busiest day of 2010. Corporations are taking the opportunity in the low-yield environment to borrow money out to ten years at never before heard of rates. And why wouldn't you? Your cost of capital will be reduced to bargain levels for years to come.
One wonders, therefore, how long low yields will last. With the world loaded up on US Treasuries, there can only be so much appetite across the risk spectrum. Investors looking for relatively safe income streams can take the step away from Treasuries at 2.6% and into the likes of a Hewlett Packard ten-year at 7%, fairly comfortable in the knowledge HP is not about to go bust.
The stock market, nevertheless, would rather the money came its way instead. On the third busiest day of the year for bonds, stock turnover was again a paltry 900m on the NYSE. Dividend yields are challenging Treasuries as a better return, but with dividends comes the risk of capital loss. A 7% HP coupon looks much more inviting in the current state of uncertainty.
One must also wonder what these corporations are going to do with all the money. They are already loaded up with record levels of cash. Are they levering their balance sheets once more, so that the cash can now be “put to work”? We can only hope so.
The US dollar index slipped 0.4% on the euro's bounce last night to 82.57 and the Aussie regained nearly a cent to US$0.9189. Gold stood still at US$1255.30/oz.
Oil turned around and rose US58c to US$74.67/bbl on the weaker US dollar while base metals found renewed buying support, with all bar aluminium rising 1-3%.
The SPI Overnight rose 30 points or 0.7%, suggesting a reversal of yesterday's dreary downward drift.
It's unemployment day in Australia today.
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