Daily Market Reports | Jul 27 2011
By Greg Peel
The Dow fell 91 points or 0.7% while the S&P lost 0.4% to 1331 and the Nasdaq dropped 0.1%.
I'm going to go to sleep now. Please wake me up on August 2.
Actually I'd prefer to be lying on a beach, which is what most of Wall Street is doing at the moment as the farce in Washington plays out. The pathetic thing is that the whole world seems to already know how the play ends – with a last minute resolution as has been suggested in this Report for a couple of weeks now – yet still we have to endure the ham acting and dubious plot line. It's summer break time in the US, and minimal trading volumes tell the tale. Why spend your break being anxious?
Unfortunately, the US Treasury has more money in the kitty than it had anticipated so in reality the deadline is August 8. OMG, this might yet go on for another week. Last night the White House indicated it would veto the latest bill proposed by the Republicans even if it was passed in both houses. We're back to Square One. There's little point now in reporting on the progress until there actually is an agreement. Suffice to say, the veto news took Wall Street lower on the open, and that's where it stayed.
Moving into the real world, earnings season rolls on in the US and two themes have emerged. One is caution, the other is the split between the old economy and the new. To date most companies have managed to match or beat the ambitious earnings estimates assumed by the Street but the subsequent response has been weak. This is because next quarter guidance, and general outlooks, have been cautious and disappointing. Not because of the debt ceiling joke – just because the US economic recovery is stumbling along at best.
This was the case last night when the old economy names of US Steel, 3M, United Technologies and Boeing – Dow components all – posted results that where near enough but all suggested dour outlooks. Hence US Steel was down 8%, 3M 5%, UTS 1% and Boeing 2%. United Parcel Service is not in the Dow but is considered an economic bellwether, and it also provided a hesitant outlook. Its shares were down 3%.
On the flipside is the new economy, and to date we've seen not just beats but blow-aways from the likes of Apple, Intel and Microsoft and last night it was Amazon's turn after the bell. Its shares are up 6% in the after-market. And incidentally, last night Apple shares (second biggest stock in the US by market cap) hit a new all-time high. The old/new split can be seen in last night's index movements, with the Dow weak, the Nasdaq only slightly off, and the S&P again splitting the difference.
Economic data were mixed last night. There was conflicting news on the US housing front with new home sales down 1.0% in June but the median sales price up 5.8%. Seems rather too big a number to be accurate. The Case-Shiller 20-city price index meanwhile was flat for May, with year-on-year prices down 4.5%.
The Richmond Fed manufacturing index slipped into contraction this month, falling from plus 3 to minus 1, but the surprise was the Conference Board monthly consumer confidence measure which showed a jump to 59.5 this month from 57.6. It's still a very low number in confidence terms but according to the Conference Board, US consumers are looking forward to jobs growth ahead. Maybe the average American has written off his elected officials as an irrelevant joke as well.
As Apple hit a new all time high, so did the Swiss franc against the US dollar. The Swissy is the one paper currency being trusted by global markets at present given the blow-out debt levels behind the dollar, euro and yen. The real currency – gold – has been hitting new highs every session over the past few, and it added another US$5.10 to US$1619.90/oz last night.
The US dollar index has now slipped to its lowest level of the year, and the way things are going it could hit its all-time GFC low at 72 before the week is out. The index is down 0.8% to 73.51 and the drop is starting to have a mathematical impact on commodity prices. Base metals in London were all up 1-2% last night, as was silver. Brent oil was up US34c at US$118.28/bbl and West Texas is steady just under 100.
You'd expect everyone to be bailing out of US Treasuries at the moment on default risk but they're not, because there will be no default. Indeed, the ten-year yield fell back 6bps last night to 2.95% despite a softer than usual response to the Treasury's two-year note auction. The response may have been soft, with foreign central banks buying 28% compared to a 31% running average, but bond traders called it pretty solid under the circumstances.
The SPI Overnight was down 16 points or 0.4%.
What we really have to wonder about now, rather than will they-won't they, is what the market response will be when a resolution is announced in Washington. The VIX has ticked up over 20 suggesting put protection has been sought, and while the stocks indices have been weak, volume has been almost undetectable. Do stocks suddenly soar? Does gold collapse? Does the US dollar spike put pressure on commodity prices or do commodity prices surge anyway? One might assume so, but then right at the moment it seems that everyone is assuming so – just not taking too big a bet.
We can only hope, at least, that a US dollar recovery will take the latest pressure off the Aussie, which is now at US$1.0950 and threatening to breach new territory over 1.10. We just don't need that right now.
And on that note, today in Australia brings the all-important number – the June quarter CPI. Where goes the CPI goes the RBA. Economists are looking for 0.7% growth on both the headline and the RBA core reading. Watch the Aussie move if the number comes in markedly different either way.
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