Daily Market Reports | Sep 10 2010
By Greg Peel
The Dow closed up 28 points or 0.3% while the S&P gained 0.5% to 1104 and the Nasdaq added 0.3%.
Wall Street has rallied in five of the last six sessions but still managed to go pretty much nowhere. You could spread a rumour on the floor at the moment that McDonald's sold 100 less hamburgers across the globe last month and the Dow would fall 100 points. That's about the state of it.
Or you could announce that last week's new jobless claims fell by a better than expected 27,000 to 451,000 and the Dow could rally nearly 100 points as it did last night. Never mind that these weekly numbers are invariably good one week and bad the next, nor that the Monday holiday meant nine out of 50 states put in guesstimates. Or that 150,000 new jobs are needed in the US each month just to stay ahead of population growth.
There was also better news on the US trade balance front, depending on which way you interpret it. The July trade balance shrunk the trade deficit from June by 14% to $42bn when economists had expected only a reduction to US$47bn. The fall was driven by a 2.1% drop in imports and a 1.8% rise in exports. For the first time in five months, the specific trade deficit with China shrunk.
As far as global imbalance is concerned, these are exactly the sorts of numbers the doctor ordered. More of the same helps to get America out of debt. But the bulls still want the US consumer to spend, spend, spend to get the economy away from a double-dip, and falling imports are not a positive sign on the consumer front.
Turnover on the NYSE, nevertheless, only just managed to scrape over the 800m mark last night which is about as low as it's been of late. Clearly the Jewish New Year celebrations this week are keeping half of Wall Street away, but the question remains as to whether volumes will see any pick-up next week.
What would have been an otherwise pleasant lunch was interrupted when Germany's largest bank, and one of the world's largest investment banks – Deutsche Bank – announced it was planning to raise E9bn in new capital. On again/off again European fears were reignited. If Deutsche has to raise that much capital, what does it imply for smaller European banks?
The reality is that Deutsche Bank is raising capital in order to fully take over Deutsche Postbank, of which it currently owns 30%. DB snapped up the 30% stake amidst the crisis of 2008 in order to secure a deposit base when capital adequacy was of immediate concern. But the market cap of the other 70% of Deutsche Postbank is only E6bn, leaving the market to assume the extra E3bn is all about shoring up a fragile balance sheet.
DB reported a tier one capital ratio of 7.5% as at June, which does not compare too unfavourably with those “safe” Australian banks on around 8.5%. It also puts DB ahead of the new Basel regulations requiring a minimum 7.0%, up from 2.0% previously. (Can you believe it? That was 50 times leverage!). Suggestions are that DB simply wants to build up a larger buffer, and the original 30% stake acquired in Deutsche Postbank included an option for full acquisition in 2012 anyway. It must also be noted that DB has not raised any capital post-GFC.
So the conclusion is the capital raising is not as onerous as it might seem, despite the Dow falling all the way back to the flatline on the news. Wall Street tried to rally at the death but couldn't sustain any momentum.
In the meantime, all the action was over in the bond market. The US Treasury auctioned US$13bn of thirty-year bonds and no one was much interested in buying them. It's the first auction of its sort for a while, of any duration, that has seen a settlement yield above the previous yield (3.82%).
It is understood, of course, that the Fed is allowing mortgage securities (holding 30-year mortgages) to expire and reinvesting into shorter dates (2-10 year Treasuries) which may provide some explanation. But a now jittery bond market responded by selling the ten-years big time, sending the benchmark yield up another 11 bips to 2.76%. If Wall Street is resigning itself to the fact QE2 is not far off, in which the Fed will expand its balance sheet further with Treasury purchases, then the bond market is not making the same indication. The bond market seems worried that recent economic data, such as last night's weekly jobless claims, are looking better.
There was a similar response in the gold market, with gold falling US$11.30 to US$1244.00/oz as it continues to show signs of the jitters near the all-time high. The US dollar index only ticked up slightly to 82.70.
The Aussie surged another half a cent to US$0.9234, but that all happened yesterday when the world's strongest developed economy once again confounded economists with extraordinary full-time job gains. At 5.1%, Australia's unemployment rate is almost back to what was once considered “full employment” of 5%.
[The reason why 5% and not 0% is considered “full” is because at 0% there would be no one left to fill any new job that was created through growth, and wage inflation would run amok. A decent “reserves bench”, if you like, is seen as a Goldilocks requirement.]
In contrast to Wall Street, volumes on the LME have been strong of late and trading choppy. Metal traders are still trying to come to terms with Beijing's efforts to reduce energy intensity by switching off the power to industrial areas, while positive US data and low inventories are fighting the other way. Last night's session ended with 1-3% falls. Oil fell US42c to US$74.25/bbl.
It's probably about time we had another look at the VIX volatility index on the S&P 500, which has this week been hovering around in the 21-22 range. A lack of volume in shares should translate into a lack of interest in options as well, despite intraday volatility, so these levels are no great surprise. But Wall Street has also been rallying, so if the VIX falls under 20 be very wary.
The SPI Overnight rose 19 points or 0.4%.
The Chinese trade balance is out today, along with house prices. The trade balance should show the offset of the US result amidst the numbers, but given Beijing is damned fast with the abacus these will actually be August numbers. What Australia doesn't want to see is a big drop in imports.
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