Daily Market Reports | Oct 21 2010
By Greg Peel
The Dow rebounded by 129 points or 1.2% while the S&P rose 1.0% to 1178 and the Nasdaq rose 0.8%.
Rate hike? What Chinese rate hike? It would appear that with a bit of time to think things through, Wall Street decided last night that a Chinese rate hike is not the end of the world. The significant bounce in the US dollar on Tuesday night was all about short-covering in an overstretched market, and there are few who don't believe the dollar is overdue a correction in its secular shift to the downside.
With time to ponder, currency traders would have realised that a rate hike in China means Beijing is putting pressure on itself to revalue its currency and that the confidence shown by the hike likely suggests a revaluation of the renminbi is not far behind. A move up in the renminbi against the dollar simply means the dollar moves down.
And move down it did last night, by 1.3% in its index to 77.21. If you'd been in a coma for two days you wouldn't notice any difference. The Aussie also spun around, regaining 1.7 cents to US$0.9863. And the yen is once again approaching its highest level on record since floating around 40 years ago.
Commodities also rebounded, although not quite as dramatically as they fell on Tuesday night. Gold recovered US$10.50 (UD$1344.00/oz) of the US$40 fall that probably put a few frighteners through the weaker retail positions. Silver (US$23.89/oz) regained about half its one dollar loss.
Aluminium and copper took back around 1% after a 3% fall on Tuesday while the other base metals all rebounded by 3%. Oil recovered by US$2.28 to US$81.77/bbl.
So with order restored, Wall Street could once again focus on the earnings season.
In the financial sector, the two major releases were juxtaposed. Morgan Stanley suffered from what we might now call the “Macquarie factor” in that being mostly an investment bank, it wallowed in a lack of volume and activity during the quarter and saw a 67% drop in profit. Funnily enough however, Goldman Sachs is in the same game but on Tuesday released a cracker of a result. It helps if you run the world.
Wells Fargo, which is more of a commercial bank, posted a record profit.
On the subject of financial stocks, to return to the “thinking it though” theme it was clear as bank stocks rebounded last night that Wall Street now realises the law suits being brought regarding dodgy CDOs will not bring down the sector.
The highlight of last night's releases nevertheless came from the airline sector. Boeing (Dow) did well but five airlines all did well, including AMR (American Airlines) which posted its first profit in two years and jumped 11%.
United Technologies (Dow) added to the excitement while after the bell, eBay surprised to the upside and is up 6% in the after-market.
It's a rule of thumb that if transports are doing well then the economy's doing well, and if the world's biggest online auction house is thriving then surely the US (and global) consumer can't be dead? Is quantitative easing really necessary?
That question was further raised on the release of the Fed's Beige Book last night – its anecdotal six-week survey of economic activity in each of the twelve Fed regions.
If anything, this Beige Book was a mild “upgrade” from the last. The previous report was quite downbeat, noting a definite slowing across most regions, but this one at least had manufacturing looking okay, retail sales modest and housing stable. Yet the Fed also noted a reluctance to hire, which leads to the heart of the unemployment problem, and feared that one more shock to the system could send wages and prices on a downward spiral, ie deflation.
There was thus nothing in the Beige Book to change market expectations on QE2. Wall Street has factored in, it would seem, US$500bn of freshly printed dollars which may well come in the form of US$100bn tranches each six-week cycle depending on a running report card. This announcement is due on November 3.
The “baked in” nature of QE2 continues to be exhibited by the bond market, which was relatively steady last night. The bond market did not react at all to the panic of Tuesday but it seems unlikely the ten-year yield can fall that much lower given the extent of bond positions held.
The SPI Overnight recovered 24 points or 0.5%.
Earnings releases tonight in the US include Amazon, American Express (Dow), AT&T (Dow), Caterpillar (Dow), Credit Suisse, Freeport McMoran, McDonalds (Dow), Travelers (Dow), Union Pacific and United Parcel Service.
Ahead of those, however, it's a big day in China. The monthly round of inflation, investment, retail sales and industrial production data will be released but so too will third quarter GDP be revealed. Consensus is for 9.5% growth, down from 10.3% in the second quarter.
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