Daily Market Reports | Dec 08 2010
By Greg Peel
The Dow closed down 3 points while the S&P was flat at 1223 and the Nasdaq gained 0.1%.
President Obama is clearly a man caught between a rock and a hard place. Having declared over and over that the US budget could simply not afford the loss of income implied by extending the Bush tax cuts to all brackets, including to the top 2% mega-earners, he was forced into compromise by the Democratic drubbing at the mid-terms. As anticipated by Wall Street, the Bush tax cuts will now be extended in full for two more years.
Obama nevertheless was able to win concessions on other policies, including extending benefits for the long term unemployed and providing tax breaks for parents putting their children through college, and Wall Street was surprised to find that despite the addition of the top 2% cut there were also payroll tax cuts within the package. Yet while the Republicans are still obviously opposed to Obama Administration policies, liberal Democrats are also unhappy. They see their president as a sell-out.
And so it was an ordinary press conference held this morning (Sydney time) in the wake of the tax policy announcement morphed into an impassioned speech from the president – unintended – with disillusioned Democrats clearly the target. In short, Obama made it clear that while he had been forced to compromise on the top 2%, his opposition to such a move remained steadfast. Indeed, his own concession is that the extension lasts only two years. At that time, of course, America can vote on the issue, but the president remained resolute in believing the deficit will only suffer in the meantime as a result. Compromise has been a necessary part of American history, the president entreated to a now silent room. If not, he himself would not have been “allowed to walk in through the front door”. There ended the press conference.
And there ended the rally. While largely anticipated, confirmation of the top 2% compromise had the Dow up 90 points on the open. It wavered through the session and was up only 50 ahead of the press conference, but as the conference began in typical fashion the average moved up to be about 75 points higher. Then came the unscripted speech, and then the Dow dropped like a stone. Perhaps Wall Street was not happy that Obama was still vehemently opposed in principle to the top 2% compromise and that he had no intention of extending it past two years.
Or perhaps the real impetus, exogenous to fiscal policy, was an unqualified Reuters wire that hit trading desks at the time suggesting US authorities were stepping up the level of their insider trading probes. Or with stocks having run up strongly the past few days on anticipation of the Obama compromise, perhaps it was just a good opportunity to sell the fact and book some profits.
Nevertheless, if the US stock market is now heartened by fiscal policy, the US bond market is not. If ever one might be able to pinpoint exactly when the US bond “bubble” burst it was last night.
Having toyed with the 3% yield level recently even as the Fed has been buying, with a lot more buying to come, last night the benchmark ten-year yield exploded through 3% and jumped an extraordinary 22 basis points to 3.15%. The bulk of the move came long before the president's press conference. The two-year added 11bps to 0.54% and the thirty-year – upon which mortgage rates are set – jumped 15bps to 4.19%. These were still not highs for the day. As the press conference played out, Wall Street sold stocks and bought back some bonds.
Is it simply finally time for US investors to switch out of bonds and into stocks? Well it's easy to make the case. The Fed is determined to see stock prices higher and that's what QE2's all about. QE2 devalues the US dollar and offers longer dated inflation risk, and now the tax compromise is in place the deficit is also compromised. If the US is unable to reel in its massive deficit over time then lending the government more money does not seem like a sensible investment strategy.
Despite the US bonds suffering a big sell-off last night, the US dollar index actually finished higher. There is anxiety once more stemming from Ireland where the new austerity package legislation is being put to parliament. The package must be passed before the EU-IMF will hand over its E85bn in aid.
The financial markets really were all over the shop last night. Bonds were sold despite a stronger dollar in at least partial fear of inflation pressures and that should also be an impetus for gold, but having run very hard in the last couple of sessions gold saw some hefty profit-taking last night, falling US$23.40 to US$1401.60/oz. One presumes, as is always the case at “big figures”, that gold needs to do a bit more work around the US$1400 mark.
Commodities were mixed. Oil fell US83c to US$88.56/bbl while copper continued its relentless rise, gaining another 1%.
In terms of stock market turnover, it was a big session last night. However a solid half of the volume was ascribed to Citigroup shares alone. While Citi is almost always the most highly traded stock, last night the US government sold down the last of its TARP-related ordinary share holdings. While investors are now more keen on an investment in Citi (and the end of TARP means dividends can now be paid once more), the truth is Standard & Poors will now rebalance the S&P 500 to re-include the previous government tranche in open market calculations. Citi's market cap ratio thus increases accordingly, and as such index funds had to buy Citi shares over the session and on the bell to maintain correct weightings.
At the time the detractors suggested the US government should not use taxpayer funds to bail out Citigroup and its peers. But at the end of the day the US taxpayer has done very nicely.
The SPI Overnight was up 2 points.
Today in Australia sees the monthly housing and investment lending data.
A reminder that Rudi will appear on Sky Business's Lunch Money program tomorrow at noon, and I will be appearing on Business View at 2pm on Friday.
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