Daily Market Reports | Nov 11 2010
By Greg Peel
The Dow rose 9 points or 0.1% while the S&P gained 0.4% to 1218 and the Nasdaq added 0.6%.
A couple of days of post QE2 profit-taking encouraged by a stronger greenback due to European wobbles has seen Wall Street in a selling mood. Last night the Dow opened down 90 points.
The fall was in lock-step with yet another rise in the US dollar which was spurred on by weak demand for an auction of Portuguese sovereign bonds. Adding to the mood was news that China's trade surplus had blown out again in October, forcing Beijing to again raise its bank reserve rate to tighten monetary policy.
It was the Chinese trade balance news that sent the Australian market into a spin yesterday afternoon. China's surplus grew as exports expanded but imports fell, and news that copper imports were down 26% on September, oil down 30% and iron ore down 19% was a bit of a reality check for a market which has been assuming ongoing commodity price rises based on QE2 inspired USD weakness. Just because commodity prices rise in currency terms does not guarantee volumes will even remain static, let alone grow.
The numbers may also have been a bit of a wake-up call for the Australian Treasury, the government, and the RBA. If I hear one more load of crystal ball rubbish out of Canberra with regards to a definitive return to surplus in the distant future I will spontaneously combust.
However, the drop in commodity imports should not be a huge shock and if anything it's what resource sector analysts have been expecting. Our own September trade data released last week showed a 13% drop in coal exports to Japan. China's purchases do not work on a basis of onward-ever-upward. Inventories cycle up and down and monthly swings can be volatile. It's healthy, nevertheless, for the market to occasionally be brought back to earth.
The US also released its October trade balance last night, and Wall Street was pleased to see a slight drop in the deficit. However, the balance with China remained elevated, so in combination with China's increased surplus there will be further pressure put upon China at the G20 meeting over the next couple of days to revalue the renminbi.
It will all be a waste of strained vocal chords of course – Beijing will act as it sees fit and when it sees fit no matter who complains, and the complainant with the least credibility is the currency manipulating US. Economists expect Beijing to revalue before the end of the year anyway, and G20 arguments are mostly just for political show. Beijing and Washington will have nutted out a compromise between renminbi revaluation and size of QE2. More US dollars undermines the value of China's significant US bond investment and renminbi revaluation does the same. So the two can be balanced to achieve the same result.
On the matter of US bonds, the bond market was right to fear weak demand for last night's auction of US$16bn of thirty-year bonds. Demand was indeed weak and the yield on the thirties pushed to their highest level since May. However there was a reluctance to buy ahead of the G20, but more so ahead of the specific release of the Fed's initial QE2 schedule.
After the auction, the Fed announced it would start by buying US$105bn of Treasuries of which US$75bn represents QE2 and US$30bn QE1 rollovers. Relief came in the form of the maturity breakdown which, despite earlier assumptions the Fed would only buy in the 2-10 range, included a proportion of thirty-year bond buying. On that news, the thirty-year yield turned around and ran back down to where it started.
The weekly new jobless claims number released early in the session showed a bigger fall than expected, and inflation data out of the UK confirmed that the Bank of England would definitely not need to start QE2 of its own. On that news the pound rallied and the US dollar index fell back again, all leading to a rebound on Wall Street which kicked the indices up to a positive close.
There was probably also some squaring up in the US dollar after a few days of rally ahead of the G20 meeting. No one ever expects anything meaningful to come out of such meetings, but with a Currency War raging it's better to play it safe.
So the dollar index closed slightly lower at 77.66 and the Aussie a tad higher at US$1.0055. After their big afternoon dumps on Tuesday night on the news of increased futures margins, both silver and gold rebounded last night. Unsurprisingly, the silver ETF (which is not subject to margin) saw a buying surge to send the spot silver price up 3% to US$27.28. Gold bounced US$14.70 to US$1404.60/oz.
Base metals in London were a bit shaken by the Chinese import numbers and were looking toward today's release of data from Beijing, including industrial production and inflation numbers. The metals were all down around 1% after big moves up on Tuesday night.
After the big drop on the local bourse yesterday, and positive result on Wall Street last night, the SPI Overnight is up 30 points or 0.6%.
The monthly employment figures are out in Australia today ahead of the monthly release of all the Chinese data. Tonight in the US is Veteran's Day which means banks and the bond market are closed, but stocks and futures are open. Traditionally it's a quiet day.
Lest we forget.
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