Daily Market Reports | Nov 24 2010
By Greg Peel
The Dow fell 142 points or 1.3% while the S&P fell 1.4% to 1180 and the Nasdaq lost 1.5%.
Have we seen this movie before?
Earlier this year global market resolve was being sorely tested by a rolling wave of uncertainty. There was European sovereign debt, Chinese tightening, law suits on Wall Street, a volcano in Iceland, an oil spill in the Gulf, and even some disturbing sabre-rattling out of Israel. Post the QE2 bounce we now have European sovereign debt, Chinese tightening, FBI raids on Wall Street, we've had a volcano in Indonesia (which is still gurgling), we have a potentially tragic mining accident in NZ, and now we have North Korean insanity once again raising its ugly head.
News broke yesterday evening (Sydney time) that North Korea had fired missiles into a disputed island off the coast of the Korean Peninsula. The attack on the township thereupon represents the first attack against civilians in this unresolved dispute since 1953. South Korea shifted to a war footing and the rest of the world held its breath.
A Korean observer interviewed this morning on CNBC suggested that North Korea was simply “seeking attention” to promote awareness of the succession to the new boy-king. But with China bordering North Korea on the one side and Russia on the other, and with Japan just across the water and US bases nearby, the expert suggested that war was not a threat. No one in the neighbourhood wants one.
But it was never going to help global sentiment and so we had 2% falls in Europe and a follow-through on Wall Street.
The tension comes at a time when Ireland continues to hog the spotlight. The mood has turned ugly in Dublin as the Irish people launch aggressive protests and call for the resignation of the prime minister. The prime minister will no doubt call an election soon but has vowed to see through the bail-out details and resultant updated 2011 budget before he does so, which is sensible. But right now he is the target of Irish hatred in a rescue which is seen as bailing out the guilty banks while unemployment soars and working class Irish suffer.
We've seen that movie before too.
Adding to global unease is the recent suggestion by Germany that it may reintroduce the Deutschmark to trade alongside the euro. Last night Angela Merkel suggested in a speech that the single currency faces an “extraordinarily serious situation”. Germany is either preparing for what it sees as inevitable or is stealthily attempting to bring about the dissolution of the eurozone to allow it to break free from the shackles of the PIIGS and their woes. No doubt such a move would be a political winner at home, but the reverberations would be potentially catastrophic. Large European banks are up to their eyeballs in euro-denominated PIIGS bank debt.
Nor did it help the US cause last night when it was announced existing home sales fell 2.2% in October to mark a 26% fall year-on-year and ram home the issue of an unresponsive US housing market. The number was not a surprise given the lead-in from earlier pending sales data, but not welcomed nevertheless.
The sales figure overshadowed the final revision of US third quarter GDP, which came in at 2.5% against expectation of 2.4%. A big jump in the Richmond Fed manufacturing index was also overlooked. This index rose to 9 from 5 against expectations of 6 and provided a two-from-three positive result in November between the three big manufacturing zones of New York, Philadelphia and Richmond, with the Philly being very negative.
Then late in the session we had the release of the minutes of the Fed meeting which gave us QE2.
It was an unusual set of minutes given that which it divulged. Despite a 10-1 vote on QE2 action, with Mr Hoenig the longstanding dissenter due to asset bubble fears, there was still disagreement in the ranks based on concerns about promoting runaway inflation and sinking the US dollar. Economists were taken aback to hear that the FOMC had held a secret emergency meeting in October in which the hawks among the committee pushed for a major “shock and awe” campaign of extensive and immediate QE but were talked down into agreement on a more incremental plan.
Realistically, the Fed should be thanking its lucky stars Ireland came along and ignited a bounce in the dollar, albeit the minutes implied that despite the public “strong dollar” mantra the committee did not think a bit of dollar weakness was a bad thing at this point. Another suggestion was that Ben Bernanke should make it a policy of holding a press conference post the meetings to explain and take questions on the FOMC decisions rather than appearing and clandestine and aloof as it currently does. Were this to happen, no doubt Bernanke would be straight on the phone to Jean-Claude Trichet to get some tips on how to handle the mob. Or he could watch some Trichet videos for tips on how not to behave at a press conference (ie like an arrogant fool).
The minutes also contained the Fed's latest update of US GDP forecasts, which was a downgrade to expectations of 3.0-3.5% growth in 2011 from the 3.5-4.2% previous forecast. This was no great surprise and came at a time the market was already weak.
After a solid result for the two-year note auction on Monday, the Treasury received more tepid demand for the US$35bn of five-years up for grabs last night. The 1.411% settlement was higher than traders had anticipated and foreign central banks bought only 32% compared to a running average of 47%. The ten-year yield nevertheless fell 4 points to 2.77% to reflect everything else that's going on in the world.
Which includes, also late in the session, news that more US hedge funds had been raided by the FBI including one particularly large and well known one in Steve Cohen's SAC.
The euro continued to tumble last night to under US$1.34 while the safe haven US dollar jumped 1.3% to 79.68 and the Aussie risk indicator fell 1.7 cents to US$0.9721. Despite the big jump in the US dollar, gold was still another haven of choice, rising US$9.10 to US$1375.80/oz.
Base metals, and silver, all fell 1-2% with the exception of nickel which was slightly positive. Oil slipped only US23c to US$81.53/bbl, possibly reflecting the upside potential for the oil price in times of war.
The SPI Overnight fell 51 points or 1.1%.
It's all happening. The US VIX volatility index, incidentally, was up 12% last night but is still only just over 20. There is a wealth of economic data out in the US tonight ahead of the Thanksgiving break. One possibly interesting point to note is that with everything going on, Wall Street simply fell on the open and remained pretty much at the same level all session last night. It was not a panic selling day.
Rudi will spend an hour chatting to Brooke on the Sky Business channel program Lunch Money at noon today.
If you're wondering about the reference in today's title, click here.
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