Daily Market Reports | Mar 14 2011
By Greg Peel
Heading into Friday's open on Wall Street, traders had been concerned about Saudi Arabia's expected “Day of Rage” protests and their potential ramifications for the oil price. There were some protests reported, but all in all the Day of Rage was a fizzer. In isolation, this was enough to allow the oil price to slip back.
But America awoke to the news of the Japanese earthquake and pictures of the devastating tsunami, and suddenly MENA was no longer in the spotlight. While Wall Street opened slightly weaker, it was able to rally later in the session on light volume as the oil price continued to fall. The cold reality is that a number of Japanese refineries were shut down, and that means less demand for crude in the interim.
Older hands were also able to draw on their experience of the 1995 Kobe earthquake. While the Nikkei tanked at the time (and in so doing took out Barings Bank after Nick Leeson, caught long, ran away), the anticipated impact on the global economy was not sufficient to upset Wall Street. Japan's economy then, as now, was in the doldrums already. The reality of such disasters – as has been applied by analysts recently in view of both the Christchurch earthquake and the Queensland floods – is that the initial period of lost GDP contribution is followed by a period of rapid growth from rebuilding, thus squaring the impact over time. Clearly Japan has some massive rebuilding ahead.
As such the yen recovered from an initial fall on Friday and pushed higher. The expectation is for a flood of repatriation of yen investments as funds are reallocated to local restoration.
Over in Europe, the eurozone leaders were holding another meeting. While there was no further talk of debt restructuring, Germany did agree to allow lower interest rates on bail-outs if certain measures are met, such as stiffer budget cuts, raised retirement ages and so forth. The meeting was seen as progress, and as such the euro was stronger. Between the yen and the euro rallies, the US dollar index fell 0.8% to 76.69.
Brent dropped US$1.59 to US$113.84/bbl. West Texas fell by a similar amount, and in later after-market trading had dropped below the psychological US$100 mark. It was the fall in oil which allowed stocks to rally.
The Dow closed up 59 points or 0.5% while the S&P added 0.7% to 1304.
China had earlier released its monthly economic data, which included an inflation rate steady at 4.9%. Steady is better news than rising, but then economists had expected a fall to 4.8% to reflect policy tightening efforts. So there is more work for the PBoC to do.
The US economic news on Friday was a 1% rise in retail sales in February as expected, but a big fall in the Michigan Uni consumer confidence measure which was put down to inflation expectations. These, in turn, are fuelled by the high oil price.
While the oil price may have fallen on Friday night, subsequent events could yet send oil higher again. Attention has now turned to potential atomic meltdown at one or more Japanese nuclear reactors. This in itself is of grave concern, but oil analysts are also looking to the loss of power generation capacity which will need to be substituted from other sources, such as coal and oil products.
Other commodity markets were undecided on Friday night, with copper ticking up slightly but all other metals closing weaker. Gold was little moved, up US$4.50 to US$1416.80/oz, but silver took off again with a 2% jump to US$35.91/oz. The Aussie gained one and a half cents on the US dollar drop to US$1.0150.
The SPI Overnight was up 8 points or 0.2%.
This week will be one in which the world holds its breath for a major nuclear disaster. While aftershocks continue to rock Japan, we are yet to see the inevitable “big one” of aftershocks which could well trigger further tsumanis. The Arab League has endorsed a no-fly zone in Libya as Gaddafi's forces continue to gain the upper hand. Saudi Arabia seems contained, and notably Saudi oil production was at its highest in February since 2008 as Libyan shortfalls were made up.
The US economic week begins on Tuesday with the Empire State manufacturing index, the NAHB housing market sentiment index, and the results of the Fed monetary policy meeting. QE3? There probably won't be any clues as yet.
Wednesday it's housing starts and the producer price index and on Thursday industrial production, the Philly Fed manufacturing index, and the consumer price index. Friday night is “quadruple witching” on stock markets as various derivatives expire.
Tomorrow in Australia sees the release of the minutes of the March RBA meeting, vehicle sales and lending finance, and on Wednesday it's fourth quarter dwelling starts and the Westpac leading economic index. Thursday brings the RBA's monthly bulletin.
Stocks continue to go ex-dividend in Australia this week and DRP selling will also continue. While fundamentally weak last week, falls on the ASX indices were exacerbated by the dividend effect. Last week was nevertheless the busiest with ex-div impacts tapering off through the month.
Now we start AGM season.
Rudi's regular Lunch Money appearance on the Sky Business channel will this week be on the Wednesday rather than the usual Thursday.
For further global economic release dates and local company events please refer to the FNArena Calendar.
