Daily Market Reports | Dec 09 2010
By Greg Peel
The Dow rose 13 points or 0.1% while the S&P was up 0.4% to 1228 and the Nasdaq added 0.4%.
On Monday China is due to release its monthly round of data, including numbers for production, investment, retail sales and, most importantly, inflation. Yesterday Beijing announced it would be moving the release date forward to Saturday. The excuse is an attempt to shift scheduled releases to a consistent date each month, but as I have noted before in this Report, Beijing likes to make monetary policy announcements on a Saturday.
Thus speculation has come to a head that Saturday will be when the PBoC announces the next rate hike, which has been anticipated since the last round of alarming inflation numbers. The world has a negative obsession with Chinese monetary policy tightening, somehow believing it threatens a collapse of the Chinese global economic driver. While indeed it is Beijing's intention to slow inflation and thus GDP growth through policy measures, it's only because they are too strong for comfort.
While China weighed on risk trades, the big story on Wall Street last night came out of the US bond market. For the second day running the ten-year yield has flown on a huge bond sell-off. While it is settling now at only 9 basis points up on the session to 3.23%, at one stage the gain was 19bps to 3.33%. The last two sessions have seen the biggest move up in the ten-year yield since the days after Lehman.
There are a couple of ironies here. Firstly, the bond sell-off (and bearing in mind a bursting of the bond bubble has been anticipated by many for some time) is being attributed to confirmation of the extension of the Bush tax cuts for all taxpayers, rich or poor. President Obama has long argued that the budget cannot afford the loss of income from extending the cuts to the top 2% of earners, and thus markets are anticipating a worsening of the deficit over time when in theory the main aim of Congress at present is to reduce the deficit.
On the flipside, economist are now moving to upgrade their US economic growth forecasts given there will not be a reduction in take-home income as there would have been had the tax cuts not been extended. Yet there's simply not going to be a Fed rate rise as a result, and indeed the Fed is in buying bonds and getting hit by a steam train.
The other irony is that all through 2009 and into 2010 the stock market bulls have been pointing to first the large amount of funds invested in money market accounts (cash on the sidelines) and then the excessive investment in bonds. The argument has been that eventually, when confidence returns, all these “safe haven” funds will flow back into equities and spark a major rally.
Well for the last two sessions investors have been dumping bonds at a pace not seen since the fall of Lehman and the stock market has gone nowhere.
Last night the US dollar index ticked up ever so slightly to 80.00, but if the world is selling US bonds due to deficit fears well you'd think gold would rise on the same basis, but gold tanked again last night – down US$20.60 to US$1381.00/oz. The metal is now back to where it was before it took off on the Bernanke Sixty Minutes interview which raised the spectre of QE3.
While some traders were arguing Chinese rate hike fears (ie risk aversion) others suggest gold just ran too far, too fast and is already a crowded trade. Thus there's been profit-taking and not a little Johnny-come-lately bailing in the last two sessions.
Or you could argue that the upgraded US economic growth forecasts, as a result of no tax cuts, means less reason to hold gold. That's the thing about gold – you can always make an argument one way or the other.
But traders on the LME were quite clear on their take-away from improved US GDP prospects. Copper traded over US$9000/t last night for the first time ever before settling back slightly, up 1.4%. News of a strike in South Africa sent aluminium up 3%, but for copper, and then in 2011 other metals, an additional driving force at present is the pending listing of metal ETFs. The ETFs will provide easier investment access for speculators, but also remove supply for the “real” users. Thus the copper price will be bid up, resulting in increased speculation, resulting in more ETF warehousing, resulting in…
Resulting in inflation – that's what – before the whole thing peaks and comes tumbling down again.
And if you were wondering just where the money flowing out of US bonds is going, if it's not going into US stocks, well last night there were two Chinese IPOs on the US stock market. Dangdang, China's answer to Amazon, rose 91% on listing. Yuoku, China's answer to Youtube, rose 188%. Call that a stag? That's a moose. Who prices these things?
No doubt US (and global) investors are using the 2005 listing of Baidu, China's answer to Google, as a guide. Baidu listed at around US$2 and is now over US$100.
There are two more Chinese IPOs tonight.
Well either the markets are all going mad or I am. Maybe it's time for a break.
The SPI Overnight was up 19 points or 0.4%.
Rudi will be on Sky Business's Lunch Money today at noon.
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