Daily Market Reports | Oct 13 2010
By Greg Peel
The Dow closed up 10 points or 0.1% while the S&P gained 0.4% to 1169 and the Nasdaq added 0.7%.
One feels there are a few rubber bands being stretched in global financial markets at present and that the extent of their elasticity is being tested. All things being equal, it was never likely to be a busy day on Wall Street ahead of the Fed minutes due out at 2pm and the Intel result due after the bell. Yet the Dow opened down 100 points.
While ongoing talk of Irish bank bondholders having to take haircuts was providing some disquiet across the pond, across the other pond China returned from holiday and Beijing wasted no time in announcing a 0.5% reserve requirement hike for China's six biggest banks (both state and private). The move was flagged on Monday and confirmed yesterday.
The move should come as no great shock given Beijing has made it abundantly clear it wants to keep a tight rein on Chinese economic growth. The last round of monthly Chinese data suggested renewed acceleration. While the reserve ratio hike was the fourth this year, Beijing has been quiet recently as it has watched the problems in Europe play out. No point in tightening the Chinese economy if Europe was going to do that anyway. But it would seem that Beijing is now content that the European crisis has been reduced to a simmer and not a rolling boil.
The announcement hit Australian stocks hard yesterday, leading to a 1.6% drop in the ASX 200 following a flat, holiday-impacted night on Wall Street. While it is no great surprise to see some selling in the face of Chinese tightening, one feels that profit-taking momentum was on a roll yesterday with impetus beyond just that of China.
As the Aussie dollar approaches parity, the market has begun to acknowledge that a strong Aussie is more of a concern than a novelty. Despite widespread broker upgrades to commodity price forecasts over the past couple of weeks, including more enthusiasm for iron ore, adjustments to Aussie dollar forecasts have netted to earnings downgrades for resources stocks. For non-resource sector exporters and collectors of foreign revenues, it's simply been a case of currency impacted downgrades.
In past times it would have been fair to assume the Aussie rubber band had stretched too far and a correction should be on the cards. But in the current situation we are no longer talking “free” markets. A currency war has erupted across the globe and despite Washington's protests to Beijing, at the centre of it all is the US Federal Reserve. If the Fed is hellbent on devaluing the greenback, then the Aussie has nowhere to go but up. And it is not the nature of the RBA to intervene beyond keeping a lid on excessive volatility.
While the adage is that “you can't fight the Fed”, Wall Street has been not fighting the Fed for weeks now. The S&P 500 has recovered levels not seen since May and it's all about QE2 expectations. With so much speculation built in to markets, just how much higher can we go, even if QE2 is announced, as expected, on November third?
This is the current dilemma for Australia. The higher the Aussie goes, the more it will impact negatively on GDP. If QE2 is announced as expected, there may even be a “sell the fact” response given so much built up speculation. And if the Fed disappoints, perhaps on size or timing, we could see quite a substantial pull-back. There's still three weeks to go.
When the Fed minutes were released at 2pm New York last night, there was an initial kick in the stock market. Stocks had crept back from their lows, but what was seen as a “QE2 upgrade” was enough to carry the Dow to 40 points up. There it met resistance before bungling through to the close.
The supposed “upgrade” came for this statement within the minutes: “several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back towards a level consistent with the FOMC' mandate, they would consider it appropriate to take action soon”.
Previously the Fed had only touted QE2 being “ready if necessary”. Now we have a “soon”. And “soon” was taken by Wall Street to mean November third. Interestingly, new Fed vice-chair Janet Yellen took the opportunity to warn against the potential “asset bubble” implications if excessively easy monetary policy was left in place for too long. But this caveat seemed less like dissent and more like approval but with a wary eye in place.
So once again we had more evidence of pending QE2, but the stock market didn't really get excited. At the time of the release of the minutes, the US dollar dropped sharply as one might expect but only from earlier higher levels. The resultant net fall on the day of 0.25% to 77.31 is perhaps mounting evidence the world is overly short dollars and maybe a correction is looming.
The same can be said for the US bond market. When the Dow opened lower bond prices opened higher, such that the ten-year yield hit their lowest point since January 2009 at 2.34%. Thereafter the sellers came in, and on the release of the minutes the selling only intensified. If the Fed's going to buy Treasuries, yields should fall on the news. The ten-year closed up 4 basis points to 2.44%. Another very well-stretched rubber band.
Perhaps too, one could argue copper is taking a bit of a breather. With Chinese buyers back from holidays aluminium, lead, tin and zinc all jumped 1-2% last night. Bellwether copper was nevertheless steady. Note that the LME after-market shut before the release of the Fed minutes.
And then there's gold. Once again, if this was a “QE2 upgrade” then we'd expect gold to rally further, but instead it fell US$2.90 to US$1350.80/oz.
Oil fell US54c to US$81.67/bbl but oil was also playing out its own story. Last night President Obama announced the end to the moratorium placed on new offshore drilling which was put in place as a response to the BP disaster. Shares in oil services companies rocketed on the news as not only are they back in business, they're back in extended business given safety inspections will be dramatically stepped up.
What we will have however, for the next three weeks ahead of the FOMC meeting, is the bulk of the US third quarter earnings season. Last night after the bell Intel (Dow) announced earnings of US52cps (vs US50c estimate) and revenue of US$11.1bn (US$11.0bn). It was a slight “beat” and ongoing guidance was slightly more positive, but Intel had already downgraded guidance back in August to a lower base.
In after-market trade, Intel shares are up less than 1%.
The SPI Overnight had a lot to absorb, and while the Intel result does not smack of any great opening surge on Wall Street tonight the 35 point jump (0.8%) in the SPI would tend to suggest the futures market is assuming yesterday's action in the physical market to be somewhat of an overreaction.
After a mildly positive NAB business sentiment survey released in Australia yesterday, today we have Westpac's consumer confidence equivalent. And tonight sees the first of the big Wall Street banks reporting in the form of JP Morgan.
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