Daily Market Reports | Oct 06 2010
By Greg Peel
The Dow rose 193 points or 1.8% while the S&P jumped 2.1% to 1160 and the Nasdaq added 2.4%.
A week ago the Dow jumped 200 points in a session based on some relatively insignificant data reads and last night was at it again. That time, the Dow simply reset 200 points higher on the open and stayed there on low volume. This time is a little different.
This time the Dow jumped close to 100 points on the open but then rallied another 100 points. Significantly, the initial reset took the S&P 500 to 1150 which is yet another level of technical significance, and then it went sailing through. Significantly, volume on the NYSE reached over 1.2bn when previously 800-900m had become the norm. In other words, this rally had a bit more substance.
There were data releases behind the rally this time as well. The US services sector PMI marked an increase to 53.2 in September from 51.5 when economists had expected only 52.3. The services sector represents about 80% of US output. The UK also surprised with its services PMI, which rose to 52.8 from 51.3 when a fall to 51.2 was expected. Only the eurozone disappointed with a fall to 54.1 from 55.9.
Now figure this one out: on the above movements, the US dollar fell, the pound rallied, and the euro rallied. Doesn't make sense? Read on.
The real impetus for last night's rally on Wall Street came out of Japan. Economists had expected that some sort of monetary policy tinkering would need to accompany the Bank of Japan's recent attempts to keep a lid on the yen, but they weren't quite ready for the extent of the quantitative easing package announced yesterday.
The BoJ announced a cut in its cash rate from 0.1% to a range of zero to 0.1%, and announced a US$429bn asset-purchase fund that would not only buy Japanese bonds – the simplest form of QE – but would also buy corporate bonds, exchange-traded funds and real estate investment trusts. In other words, the BoJ is going to step into the market and buy everything on offer, while at the same time capping volatile movements in the yen. This is not “tinkering”, this is an all-out assault.
Japanese QE still did not prevent the yen from rising against the US dollar last night, basically because the dollar was determined to fall against the yen. Why? Because if the BoJ can do it, the Fed can do it, and the BoJ might just provide the Fed with a hurry-up. This is really why Wall Street rallied.
The Bank of England is still contemplating further QE, but hasn't moved yet, allowing the pound to rise last night on the solid PMI. Only the ECB is going the other way, believe it or not, and winding back its emergency loans to European banks. Yet of all regions, Europe still appears the most vulnerable in terms of potential sovereign debt crises (unless, of course, you split Europe into north and south and note there's not much wrong with the north).
So the US dollar index fell last night, by 0.8% to 77.83, against all constituent currencies. The euro was the strongest, rising 1.2% to over US$1.38, for the simple reason it is the only major global developed economy not now either thinking about or implementing QE.
So if the world is now entering into a global phase of QE2, following the initial coordinated stimulus measures immediately after the GFC, it means that the printing presses are firing up left, right and centre. And what does this mean for gold? Gold was up US$25.80 to US$1340.40/oz last night. Silver jumped 3.7%.
It also means the Aussie is actually 0.3 of a cent higher over 24 hours at US$0.9713. This is remarkable because when the RBA didn't raise yesterday, the Aussie fell to below 96.
The weaker US dollar had the commodity funds pouring in, sending oil up US$1.35 to US$82.82/bbl, aluminium up 1%, copper and lead up 2%, nickel up 3% and tin and zinc up 4%. Higher commodity prices then fired up commodity stocks, which played their part in the 200 point rally.
Note that everything moves together – a factor which terrifies many observers. It's why we have such high levels of intraday volatility despite the VIX still being under 22. The lack of variance among asset classes represents today's commoditisation of everything into commodity funds and ETFs and so forth, which means the market reacts only as one oversized beast to information which is universally either “good” or “bad”. There is no diversification of risk.
The US bond market was the only market not to respond in kind last night, with the ten-year yield falling one basis point to 2.47%. One might expect bond yields to rise on a strong stock market rally, but then the stock market is rallying in anticipation of QE2, and that means the Fed buys bonds. So there's really nowhere to go at the moment.
The bottom line is Wall Street is building in big, big expectations for QE2. If they are met, all well and good. But if they fall even just a little bit short, look out.
The SPI Overnight rose 63 points or 1.4%.
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