Daily Market Reports | Oct 01 2010
By Greg Peel
The Dow closed down 47 points or 0.4% while the S&P lost 0.3% to 1141 and the Nasdaq fell 0.3%.
I warned in yesterday's Report that anything can happen on end-of-quarter sessions with profit-taking after a solid month being an obvious possibility. And that's exactly what we got.
Yesterday's weak session in Australia was put down by commentators to weaker private credit data, building approvals and house prices but at the end of the day it was really just book-squaring. Weak data reduces the possibility of a rate rise next week into restrictive territory so it's an offset. Today locally will be a long lunch and POETS day ahead of the long weekend in NSW, in which traders can reflect on a solid quarter.
Note that despite a fall on Wall Street last night, the SPI Overnight is up 11 points, which supports the book-squaring thesis.
It was the same story on Wall Street last night, with the exception that the session began with positive, rather than negative data.
Ahead of the bell it was revealed the US economy grew by 1.7% in the second quarter, not 1.6% as the previous estimate suggested (Woohoo!). Weekly new jobless claims fell 16,000 to 453,000 when 459,000 was expected (Yippee!) and the Chicago purchasing managers' index shocked by leaping up in September to 60.4 from 56.7 in August when a drop to 55.5 was expected (Huzzah!).
Hang on a minute – what does this all mean for QE2?
The undeniable truth is that while the September rally was born out of the oversold conditions of August, it gathered momentum solely on the back of QE2 speculation. As the calendar turned, double-dip calls were all the rage. The Fed hinted emphatically that were a double-dip to occur, the presses would roll. But as the month progressed, the economic data became “less bad”. This was enough reason to buy stocks anyway, and traders were all holding a “get out of jail free” card courtesy of the Fed. But when the Fed upped the stakes, suggesting the presses would roll simply to prevent deflation, a “win-win” situation became a given.
And so it was, that in history's worst average month of the year, the S&P 500 rose 9% to mark the best September since 1939. The S&P closed up 11% for the quarter. There have been much stronger other months, but Wall Street is just hanging on to the fact Septembers are meant to be bad. Should this strong September be seen as a sign? Nup. It's just a set of 30 days.
The Dow was up over 100 points from the bell on the stronger data. The Chicago PMI bodes well for tonight's release of the ISM manufacturing PMI which is a closely watched indicator. But that was enough to bring in the profit-takers, and so for the next hour the Dow was sold down 200 points. Volume was better than recent sessions, which is a typical end-of-quarter factor but also something the bears latch on to – all year volume has been higher on down days than up.
There was a bit of a recovery toward the close, and that was it. If you have to look for a reason why the stock market was up 11% for the quarter, you need look no further than the fact the US dollar index was down 8% for the quarter – its worst quarter in eight years. You can throw a little bit of surprise euro strength into that equation, but once again its really only about QE2.
The risk as we head into that scary month of October is that Wall Street has now adjusted for QE2. Thus if data continue to be positive, any upward pressure will be counteracted by thoughts maybe the Fed will keep the presses under cover. If the data weaken, we've already factored in QE2. Looks like more sideways to me, with greater risk to the downside.
In a couple of weeks, attention will swing to the US third quarter reporting season. Once again, Wall Street is expecting year-on-year earnings growth of 30%. Once again, it will all come down to whether or not anyone is actually seeing improved revenues yet, rather than just cost-cutting, and to what sort of guidance and commentary will be provided for the next quarter. A few disappointing reads and we could be on our way back down. But that would actually not be a bad thing. If ever we're going to break out of 2010's trading range, it won't be because of a “get out of jail free” card. A launch from a lower base would be much more convincing as we approach 2011.
The US dollar index remained steady last night at 78.78 and the Aussie slipped a bit to US$0.9660. The ten-year bond yield ticked up one point to 2.51%. Gold had a rest in falling US40c to US$1309.50/oz. Base metals were quiet in London. But oil went berserk.
Oil jumped US$2.11 or 3% to US$79.97/bbl because it focused solely on the positive economic data and does not suffer profit-taking at the end of a quarter (expiry was a week ago). Oil was up 11% for September and 6% for the quarter, largely matching the stock market because that's what oil does these days. And just as the stock market looks poised, oil is back at 80. While it has snuck over 80 a couple of times in 2010 it has never managed to seriously breach this barrier before heading back to 70 again.
As noted, the SPI Overnight was up 11 points or 0.2%.
Today is manufacturing PMI day across the globe. Monday in Australia is a public holiday in NSW which means the ASX will be open but the tumbleweeds will be rolling through. Unfortunately for some overworked journos, FNArena will be “open”, although research will be thin on the ground. There will be a Monday Report.
Note also that come Tuesday morning, the NYSE will be closing at 7am Sydney time rather than 6am. This timing will persist for another month until the US goes off summer time, at which point the NYSE will close at 8am Sydney.
[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]
