Daily Market Reports | Sep 14 2010
By Greg Peel
The Dow rose 81 points or 0.8% while the S&P gained 1.1% to 1121 and the Nasdaq jumped 1.9%.
Today I will note straight up in this Report that the SPI Overnight was up only 14 points or 0.3% last night. The reason that looks a bit lame compared to a strong Wall Street session is quite simply that Wall Street responded last night to what we responded to yesterday in pushing the ASX 200 up a percent, namely the monthly Chinese economic data (outlined in The Monday Report) and the decision on the Basel III regulations (outlined in yesterday's Banking Day report).
The Chinese data released on Saturday showed the Chinese economy was in little danger of a hard landing inspired by Beijing monetary policy. There was, nevertheless, no further policy response from Beijing in the wake of the data yesterday which many had been expecting. That doesn't mean there won't be at some later date.
The decision from the international banking review in Basel has been long awaited, and in that sense has long hung over the heads of global banks. Banks have been cashing up and increasing levels of capital both in direct response to the GFC and in indirect response to the assumption strict capital and liquidity regulations would be implemented as a result. The first part of the “good” news is thus that a decision has been reached, thus removing the general uncertainty which no one, particularly stock markets, likes.
The second part of the good news is the new regulations are not as onerous as had been feared, that many major global banks have already boosted their balance sheets to levels above those required by Basel III, and that a time line of conformity stretching to eight years is not going to cause any immediate problems. Australian banks, most notably, would have pretty much satisfied Basel III even before the GFC, at least on tier one capital ratios, and are now over-capitalised by comparison. On a liquidity basis, Australian banks have been holding on to their “general uncertainty” provisions which they had added to bad debt provisions back in 2008-09, despite the global economic scare having eased, for the very reason that new regulations might require greater cash (or liquid asset) levels.
Australian banks are not quite out of the woods yet, given the Australian “government” is yet to pass its own local financial market regulatory upgrades as has been the case recently in the US. However, it is unlikely that the local regulatory body would attempt to introduce anything too left field from the now established US FinReg and Basel III rules. There will still be some disquiet nevertheless, given the Greens will rule the Senate come July. New strict regulations regarding fees and variable mortgage rates would be immensely politically popular for any shade of government.
But from a global perspective, not only does Basel III mean most large banks won't have to raise any further capital, it means they can now start looking to “put to work” all that hoarded cash. That is a positive for the economy, and that is why the financial sector was among those leading the charge on Wall Street last night.
The materials and energy sectors were also on the move in the wake of the positive Chinese economic data. Last night oil jumped 1% to US$77.19/bbl while base metals were all up 2-3% in London.
It was text book stuff, as commodities were assisted by a sharp 1.2% drop in the US dollar index to 81.86 as Wall Street moved to re-embrace risk. The Aussie risk indicator has been flying, up another cent over 24 hours to US$0.9360. Gold did not play along though, falling US$1.70 to US$1245.00/oz as subsiding fear overcame the big fall in the greenback.
So is the rally back on? Is this it? Well, here comes the big “however”.
It was yet again a low volume night on the NYSE at less than 1bn shares turned over. The September rally has been notable for a complete lack of any supportive volume, which points squarely to more short-covering going on than actual investment. In August, Wall Street was heavily focused on a double-dip. More recently, better than expected US data and now Chinese data (and let's not forget a booming Australia) have led to doubts about a double-dip and forced traders to reverse positions. This rally lacks, as they say, “conviction”.
The upside technical target on the S&P 500 has recently been 1120. Last night we hit 1121 which means that once again we are up at the 200-day moving average. Since the S&P fell through the 200MA in May it has failed no less than five times to push above it, and on each occasion it has fallen back sharply once more. Is there enough in this rally, and in recent economic data, to push it through this time? Not without any volume one would think.
It should also be noted that the VIX volatility index closed last night at 21 – suggesting we are nearing complacency levels once more.
And what was also rather noteworthy last night is the the US ten-year bond yield actually fell on Wall Street's rally by 5 basis points to 2.75%. Every other day of rally this month has seen sharp selling in bonds, forcing yields higher, but not last night. Traders suggested the ten-year yield had reached its own technically significant level and at that point the buyers returned – those who believe bond yields must still go lower.
On the subject of fixed interest, Microsoft last night put in what for it was a huge 5% rally, which was sparked by the announcement the company intended to issue debt and use the money to pay dividends and buy back shares. Why on earth would a company go further into debt to reward equity holders (Telstra notwithstanding)? Well the simple reason is debt is cheap as chips in the US. In a sense, Microsoft is passing on its solid credit rating to unrated equity for the benefit of its shareholders, a move made easier by the fact Microsoft is carrying very little debt in the first place.
The scary thing is it also seems very false. It might be encouraging that major US corporations are locking in low costs of capital for significant periods, but at some point the word “bubble” will have to resurface.
As I noted at the top, the muted 0.3% gain in the SPI Overnight suggests a similarly modest move in the local market today given we made our move yesterday. But rolling risk appetite can always be a driver. How are Australian businesses feeling about the economic climate right now? We'll find out today when NAB releases its monthly conditions and confidence indices.
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