Daily Market Reports | Sep 22 2010
By Greg Peel
The Dow closed up 7 points while the S&P fell 0.3% to 1139 and the Nasdaq fell 0.3%.
The breaking news on Wall Street at 7am Sydney time is the announced resignation of Larry Summers, director of President Obama's National Economic Council and as such the president's most senior economic adviser below Treasury Secretary Timothy Geithner.
Summers has been the major architect of the Obama Administration's fiscal stimulus policies – those policies which have been deemed too lax by the Left but now the focus of attack from a revived Right which is almost certain to result in a swing to the Republicans in the House in the November mid-term elections. The suggestion is that the notoriously difficult Summers has been jettisoned. The speculation is that Geithner may be next.
While any Democrat executive is by default the arch enemy of Wall Street, Summers has been praised for his support of business and ex-Goldman Sachs alumnus Geithner has been seen as at least a measured supporter of the banks. While recent strength on Wall Street has included within it a factor for the expected taking of the House by the Republicans, uncertainty as to who Obama may choose to replace one or both of Summers and Geithner could lead to interim market weakness.
Back to the trading session.
Wall Street opened with the news August new housing starts rose 10.5% to 598,000 when economists had expected a fall to 535,000. Given July saw a mere 0.4% increase, this was an outstanding result. The only problem is, it was heavily biased by a 32.2% increase in apartments. Economists dismiss the apartment factor as a reliable indicator given its volatility – when you start an apartment block you're immediately starting a multiple of “houses”.
More important is the single family home starts number; it rose 4.3% to mark its first rise in four months so it was still a positive result. But single starts are still down over 9% year on year.
It was all academic, as Wall Street was going nowhere ahead of the release of the Fed's September monetary policy statement due at 2.15pm. On the release of that statement, the Dow leapt 80 points.
We have known for a couple of months now that the Fed stands ready to launch QE2 were the US economic outlook to “appreciably deteriorate”. Appropriate measures would include making a more specific commitment on the “extended period” of “exceptionally low” rates, dropping the Fed's bank deposit rate from 0.25% to zero to discourage cash-hoarding, and to simply buy more Treasury bonds with printed money. However, given the most recent US data have been “less bad” rather than “more bad” the chance of QE2 being launched has supposedly eased.
There have still been plenty of voices on Wall Street calling QE2 inevitable either way. This has largely been based on expectation that a double-dip is inevitable despite recent better data, but one must also remember that Ben Bernanke's greatest enemy is deflation and the Japanese experience his most recent example of “what not to do”. It is this which came to the fore in last night's statement given there was a subtle shift in focus away from the US economy in general and on to the matter of inflation specifically. To wit:
“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandates to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.”
And:
“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
In other words, the Fed is saying “We don't need to wait for the economy to deteriorate appreciably if we feel deflation is a threat anyway. We stand ready to launch QE2 either way”.
Given most commentators had expected little change in this statement from the August statement, this subtle shift did come as a bit of a surprise. Hence the 80 point pop in the Dow. However, the Dow couldn't hold onto it and stocks slid toward a flattish close.
The situation was very different in other markets.
The US dollar index crashed 1.1% to 80.40 and gold jumped another US$8.30 to US$1286.80/oz. The US ten-year bond yield plunged 13 basis points to 2.58% while the Aussie shot up another 0.7 of a cent to a multi-decade high of US$0.9541.
One would assume that a big drop in the dollar would translate into big jumps in commodity prices, but that was not the case. The oil pit was disappointed, having apparently wanted the Fed to actually smash the champagne bottle on the bow of the QE2 rather than simply keep pointing it out in the dock. Oil fell US$1.90 to US$72.96/bbl but it was the expiry of the October delivery contract last night, which can also mean some argy-bargy.
Final trading on the LME after-market ceases at 2pm New York time, so base metals have not yet put in a response to the Fed. They closed around 1% weaker as traders squared ahead of the release with the exception of nickel, which fell 3%.
The SPI Overnight fell 8 points or 0.2%.
Yesterday, the release of the RBA minutes provided additional weight to the argument Australian economic strength will simply force the RBA to raise rates soon, if not in October then almost definitely November. However, both the RBA, and stock market investors, need to be mindful of the Aussie dollar.
The RBA has made no secret that another rate rise would be all about commodity exports, but the higher the Aussie rises the more it acts as a dampener on the local value of those exports. It is thus not a great surprise why the local market struggled yesterday despite a strong Monday night session on Wall Street. Investors need be aware that stock analysts do not adjust their currency forecasts daily. They would mostly do so quarterly unless circumstances call for interim adjustments.
We are yet to see resource sector analysts make any meaningful currency adjustments to forecast earnings. It is likely that with the Aussie now at 95, many models are still showing 85 or thereabouts. The US dollar index has fallen 7% over the past three months and commodities indices have risen by a similar quantum, but the Aussie is up 13%. And bulks are not included in commodities indices given they trade on contract. Iron ore and coal prices are still uncertain for the next quarter.
Note that China has now entered a three-day holiday period. Westpac will release its leading economic index today and David Jones ((DJS)) will release its full-year result.
Note also that US tech giant Adobe Systems released its quarterly profit result after the bell last night, which matched expectations but fell well short of expectations on guidance. Adobe shares have been slaughtered in the after-market, currently down 15%. Wall Street will open with that in mind tonight.
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