Daily Market Reports | Dec 03 2010
By Greg Peel
The Dow rose 106 points or 1.0% while the S&P corrected its underperformance on Wednesday by rising 1.3% to 1221 and the Nasdaq added 1.2%.
All eyes were on Europe last night for the scheduled European Central Bank monetary policy update and all ears on president Jean-Claude Trichet at his traditional press conference (a commitment the Fed is now considering emulating). With apologies to Annabel Crabb, “People Skills” Trichet was at his stubborn best.
The ECB left its cash rate unchanged at 1% which came as no surprise. The central bank has not moved below this number at any time since the GFC but has instead implemented what are mostly known as “extraordinary measures” that equate to the ECB's version of quantitative easing. This involves offering short-term fixed-rate loans at low rates to eurozone banks and also buying the sovereign bonds of those members in distress.
Once the EU-IMF had bailed out Greece earlier this year and put in place the emergency fund in an attempt to stem fears of contagion, an improving euro and ebbing credit spreads allowed the ECB to begin withdrawing those QE measures. The balance of QE reduction in Europe and QE2 speculation in the US sent the euro soaring back to pre-crisis levels, right up until the time Ireland sparked a whole new round of fear. With PIIGS bond yields blowing out once more – to unserviceable levels in some cases – it has become incumbent upon the ECB to act.
The best Trichet could come up with was to confirm that emergency loans would continue to be made available to all banks in need and that the purchase of distressed sovereign debt would be “ongoing”. Trichet would not be pressed on the size of the bond buying commitment and deflected questions as to whether the ECB was actually boosting this commitment. In short, Trichet provided the bare minimum of assurance, failing to fully assuage heightened fears.
The euro stumbled initially, but turned around and ran hard on news that ECB literally was in the market buying sovereign bonds last night. The sun had also risen over New York, and economic data releases proved to be fuel for a genuine reinstatement of the risk rally. This means selling US dollars.
The same-store sales index for the major US retail chains rose 6% in November when economists had forecast 3.6%. A successful Black Friday was touted as the driver given the jump in shopper numbers and the slight rise in sales values over last year. Initially there was concern that despite the rise in traffic shoppers didn't really spend a lot, but that concern seems to have faded now, particularly after last night's number which had the consumer discretionary index soaring.
But the big shock was October pending home sales, which jumped 10.4% to mark the strongest month since records began being kept in 2001. This result is at odds with other recent housing data, and in a couple of months should translate through to actual home sales numbers to provide another burst of excitement.
There was likely still short-covering in last night's rally but it looked more like a rally than did Wednesday's step-jump gain. The Dow opened up about 40 points and then mostly kept rising. Suddenly there's a fresh round of parochial optimism to draw attention away from Europe. US economic data are quietly improving, but we won't say “green shoots” this time as that didn't really work last time.
Weekly new jobless claims incidentally rose a worse than expected 26,000, but Wall Street let that one go through to the keeper. Tonight is the November jobs report.
There has been no more talk of the Fed providing a funding injection to the IMF to help with the European situation, but now that the idea has been raised Wall Street has probably assumed Fed-ECB coordination is a likelihood were the situation to deteriorate. There has been some anger in Congress from the small-minded who can't understand why the US of A would consider bailing out a bunch of socialists, but those who appreciate that if you throw the Monopoly money around it's better not to be a crossed purposes are excited to think there is a big, global safety net in place and a central bank desire to see higher stock prices.
November seemed like a pretty weak month, although it did begin with a breach of the old April high. So with the S&P 500 closing at 1221 last night there's actually only 0.5% to go to breach that November high. A decent jobs number tonight and we might just be back in post-GFC “blue sky” (notwithstanding it will be a long road to reclaim historical blue sky). December has begun as if with a clean slate, and talk of a Santa Rally is in the air.
[Note: strictly a “Santa Rally” occurs in the week after Christmas but the expression seems to have now stretched to include a rally up to Christmas.]
I will note, just playing Devil's advocate for a moment, that Beijing is fond of announcing policy changes on a Saturday and the Korean peninsula has gone eerily quiet. Despite November's stock market weakness, various commodities have continued to push higher – particularly the agriculturals. Copper is running on inventory tightness and oil is pushing closer to reclaiming the US$90/bbl mark on stronger economic data and cold weather in the northern hemisphere. US gasoline futures are up 9% in a week. Beijing will be growing increasingly uneasy about its burgeoning inflation problem.
The US dollar index fell 0.6% last night to 80.20 reflecting a 0.6% gain in the euro as well as returning risk sentiment. We are still in this strange post-GFC world in which positive economic data means you sell the dollar and invest the funds elsewhere, and global fear means you bail into the reserve currency despite America having more debt than anyone else. Maybe one day that relationship will “normalise”.
The Aussie gained another 0.8 of a cent to US$0.9754 but gold is still betwixt and between, torn between easing debt fears, US dollar movements and inflation expectations. It was off US$3.60 to US$1383.40/oz last night. On the latter point, the US ten-year bond yield closed up 3 basis points to the psychological 3.0% mark.
Oil rose US$1.25 to US$88.00/bbl while lead, tin and zinc were up 2-3% and copper another 0.8%.
The SPI Overnight was up 45 points or 1.0%.
An interesting point to note is that last night Goldman Sachs issued a report in which it upgraded its rating for US banks to Overweight. While brokers shift around ratings all the time, the news provided a big boost for bank stocks given (a) when Goldmans talks you listen and (b) it is the first time since the GFC Goldmans has made such an upgrade to the banks. Stronger economic growth, higher equity prices and a supportive interest rate environment (steep positive yield curve) were cited as the catalysts.
It was global manufacturing PMI day on Wednesday and today it's global services PMI day. Wall Street gets all excited about manufacturing but services actually represent about 80% of US output. And it's jobs night tonight.
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