Daily Market Reports | Jun 24 2011
By Greg Peel
The Dow closed down 59 points or 0.5% while the S&P came back to 0.3% down at 1283 and the Nasdaq managed to close up 0.7%.
As Frankie Valli would say, oh what a night.
Wednesday night's startling revelation by Ben Bernanke the Fed actually had no idea why the US recovery was failing was still resounding around the corridors of Wall Street last night as stock markets opened. But things were only going to get worse.
As Wall Street slept, HSBC announced its “flash” Chinese manufacturing PMI for June had dropped to 50.1 from the May read of 51.6 to reach an eleven month low. The official number comes out next Friday, but this estimate clearly indicates China is suffering from monetary tightening, seasonal destocking, and slowing economic recoveries amongst its export markets. We are again reminded of Punxsatawney Phil, given it was around this time last year China's PMI dipped below the 50-neutral level.
And as Wall Street traders were having breakfast, an equivalent Markit preliminary read had the eurozone manufacturing PMI dropping to 52.0 from 54.6 to an eighteen month low. Markit's composite PMI, which adds in services and construction, fell to a twenty month low of 53.6 from 55.8.
The euro had staged a recovery after Tuesday night's vote of confidence in the Greek government, but on the PMI news a jittery market sent the currency down 1.6% to under US$1.42. The US dollar index subsequently rallied to 75.32. If forex traders are jittery, Wall Street traders are no less than fragile at present, so when it was revealed that last week's new jobless claims in the US rose by 9,000 to 429,000 when economists had expected a fall to 415,000, stock markets opened in a free-fall.
If all of the above wasn't enough, the first real shock of the session was yet to come. Out of the blue, the International Energy Agency, which is made up of member states including the US and Saudi Arabia, announced it was releasing 60m barrels from the Strategic Petroleum Reserve in order to counter lost production from Libya. The IEA has only made two such releases in history prior to last night, the previous release being in response to Hurricane Katrina.
Unsurprisingly, energy stocks were slammed. The counter to Libya is a direct attack on Brent crude – now the world's benchmark crude – which has played the role of substitute for Libyan production despite Saudi Arabia stepping up its own production. And it worked. At the ICE session close, Brent crude was down US$6.95 to US$107.26/bbl. West Texas chimed in with a US$4.39 drop to US$91.02/bbl.
The IEA announcement drew a mixed and heated response. The SPR is there to provide a buffer against supply shocks. Is Libya really a supply shock? The oil price has already fallen a long way from its highs. There are two likely conclusions to draw.
The first is that this is purely a political move from the US. Last night the ongoing debt ceiling and budget cut talks between the Obama Administration and the Republican majority Congress broke down yet again with Republican representatives allegedly storming out of negotiations on the Democrats insistence on tax increases. The deadline has been extended to early August before the US government will have to shut down on a lack of debt ceiling increase, but it appears a resolution is no closer. Obama is under immense electoral pressure, and now even the Fed has no idea what to do. High petrol prices have been blamed as fundamental to this year's US slowdown, and then suddenly the IEA releases 60m barrels.
Libya? Pig's you know what. But there is another reality here. Saudi Arabia cannot make up the lost Libyan production for one factual and one speculative reason. The factual reason is that excess Saudi production is of heavy, sour crude, and the world's petrol refineries are set up to crack light, sweet crude – the sort of stuff produced in Libya, in Nigeria, in the US midwest and Canada (WTI) and in the North Sea (Brent). In other words, Brent crude has indeed been pushed up by lost Libyan production. The speculative reason, on the other hand, is that Saudi Arabia simply doesn't have the capacity for the excess production it claims it has – a long held assumption.
So the sudden announcement of an SPR release might be short-term bearish from an oil price point of view, but it may also be long term bullish.
It was all too much for Wall Street nevertheless, which sent the Dow down 234 points at its low. Not only did the Dow crash back through the 12,000 mark, the S&P 500 dropped down to 1265 before it found support. 1265 is the 200-day moving average. A break of that level would spark a capitulation sell-off.
But hang on. Isn't cheaper oil a good thing, other than for oil producers? Of course it is, and so in came the buyers of airlines, railroads, consumer discretionary stocks and so forth. It is after all, no doubt, the intention of the SPR release to give the US and global economies a boost. So stock indices battled back and forth into the afternoon as traders tried to weigh up the pros and cons.
By 3pm it appeared the bears were going to win as the Dow was again down 200 points. But in a heartbeat, it was only down 100 points. WTF? A brief Reuters report had hit the wires suggesting the EU and IMF inspectors had agreed a deal with Greece for a new five year austerity plan.
Wall Street then took a little while to assess this information, and even wondered whether it was accurate. But by now the bulls were winning, and so we closed on a bizarre note with the Dow down 0.5%, the S&P down only 0.3%, and the Nasdaq soaring to a 0.7% gain.
So can we now stop worrying about Greece? Of course we can't. In fact I'm at a bit of a loss as to what's particularly new here. It may be the case that Tuesday night's vote of confidence was enough for the EU-IMF to present a longer term plan than previously, but there is no change to the fact the Greek parliament must pass the austerity bill next week. It was going to have to pass some form of austerity bill anyway, and the late mail is that despite the vote of confidence, there is at least one Greek cabinet minister who is against the earlier package.
If passed, Greece gets its tranche of the 2011 bail-out fund which is good for three months. Then we do this all again. In the meantime, the EU-IMF has delayed the decision on the 2012 bail-out fund. Unsurprisingly, the UK, for one, has said it won't have a bar of it. It will again be up to the eurozone members to carry the can, and that basically means Germany. And Angela Merkel's popularity is already rock bottom given the frugal Germans are sick and tired of their taxes being earmarked to rescue the profligate Greeks. We are very far from being out of the woods, five-year austerity plan or no five-year austerity plan.
Perhaps the best we can say is it's a step in the right direction. The VIX told the tale last night, jumping 16% earlier to 21.5 from 18.5 before settling back by the close to 19.3.
As for the other markets, well, it's somewhat academic. The US dollar index finished up only 0.5% to 75.29 after being much higher earlier, and the Aussie is off 0.5% to US$1.0523 having earlier traded in the 104s. Gold showed all the signs of a capitulation sell-off last night – a flight to cash – as it fell US$28.20 to US$1520.70/oz. Silver fell 3%.
London base metals were closed on Wednesday night when Bernanke did his thing and then closed last night before the Greek announcement. So falls of around 1% do not tell much of a tale. Similarly, oil markets closed before Reuters hit the wires but they keep on trading in an after-market and have since bounced back a dollar or so.
As might be expected, the world dived into US bonds earlier in the session which drove the two-year yield to an all-time (yes, all-time, lower than the GFC) low of 0.27% before rebounding to 0.35%. The ten-year yield closed down 7bps to 2.91%.
And after all that turmoil, what's the poor little old Aussie market meant to do today? Well the SPI Overnight is up one point. If you just woke up and read that, you'd assume it was a quiet night.
TGIF.
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