Daily Market Reports | Aug 04 2011
By Greg Peel
The Dow closed up 29 points or 0.3% while the S&P gained 0.5% to 1260 and the Nasdaq jumped 0.9%.
Had the Dow closed in the red last night it would have marked nine consecutive losing sessions. The last time that happened was in 1978. It was touch and go in the last hour, but by the close the average managed to fall over the line.
Things looked a lot more dire around 11am, at which point the Dow was down 160 points. The focus right now is on US economic data, and it wasn't getting a lot better in last night's releases.
The US services sector PMI fell to 52.7 in July from 53.3 when economists expected a rise to 53.5. Factory orders, which is a wider measure than the durable goods data, fell 0.8% in June, albeit excluding bulky transport the result was a 0.1% rise.
The global round of service sector PMIs showed Australia up to 48.8 from 48.5, China down to 53.5 from 54.1, the eurozone down to 51.6 from 53.7, and the UK up to 55.4 from 53.9. A mixed bag there, with Australia improving but still in contraction, and the UK showing everyone else up. I believe the biggest growth there was achieved in phone hacking services.
The big number everyone was waiting for in the US, nevertheless, was the ADP private sector jobs report. This number is considered by some to be a leading indicator for the official non-farm payrolls report on Friday, considered by others to be a poor indicator given regular lack of correlation with the payrolls number, and considered by yet others to be a helluva lot more accurate than anything the government could come up with. So take your pick.
ADP reported 114,000 new jobs added in July. Given the weakness of recent economic data, this was not too bad. The Street was forecasting 85,000. But when we consider numbers in March and April were exceeding 200,000, the trend is still not good. Whaddya do? Sell!
There has already been plenty of talk amongst the contrarians this last week or so that Wall Street was looking oversold, and talk that Tuesday was your classic capitulation, so at another 160 Dow points down the cavalry arrived. It was not an easy battle – there was plenty of choppiness through the day – but ultimately the buyers claimed a small victory. Is this the bottom?
Experience suggests that markets rarely turn around immediately from big sell-off days. Often there is one or more false-start rallies, and when they fail the mood becomes one not so much of panic but of resignation. There is usually a round of quieter down days and a mood of melancholy before something, not even something that significant necessarily, triggers the next run up. Let's not forget that Ben and his team will be standing there with arms outstretched grasping the safety net.
There was plenty of action across the pond last night.
Colourful media owner, womaniser, complete idiot and Italian prime minister Silvio Berlusconi last night declared the market wrong about Italian debt, suggesting rising yields reflected problems in the US and Japan and not in the Mediterranean utopia. One day politicians will learn that as soon as they make such statements, the world assumes the worst. Actually no – they'll never learn.
Fortunately the Spanish government announced a decision to go ahead with its next required auction of sovereign bonds despite borrowing costs having blown out again. Had the Spaniards stalled, the market would have seen that as a bad sign. The decision to proceed had a positive effect.
The euro rallied strongly last night but the main influence here was a decision by the Swiss central bank to cut its cash rate. The decision had nothing to do with GDP or inflation and everything to do with trying to stall the relentless rally of the Swiss franc past all-time highs. In the past the Swiss National Bank has tried Bank of Japan-style intervention into forex markets but with little success, so this time it decided to let the market do its bidding. It worked, because no one expected it.
It meant the Swissy dropped 3% against the US dollar but the subsequent rallies in all other currencies still had the dollar index down 0.6% to 74.03. Weakness in the US dollar is a reflection of the world's quiet abandonment of the reserve currency, and last night it was revealed that not only has South Korea been buying gold, but so have Thailand, Kazakhstan and Russia. Buying gold is another way to keep a lid on your currency (given you swap your own currency for gold).
Is it smart to buy gold at such elevated levels? Well, they all laughed at Mexico a while back when it piled in at US$1440/oz at what was then thought “the top”. Last night gold was a little less aggressive, rising only US$2.30 to US$1661.10/oz. Silver nevertheless rose 2%.
Slower global growth is beginning to have a more emphatic impact on commodities. Tin was again down 3%, matched by nickel, while the other base metals all fell around 1%. And finally Brent crude, which has been held aloft by pipeline maintenance disrupting supply in the North Sea, took a dive last night – down US$3.23 to US$113.23/bbl – with the trigger being a US report of weak summer demand. West Texas fell US$1.89 to US$91.90/bbl.
Finally US bond yields stabilised last night, reflecting the bounce in stock indices. Next week the Treasury will be auctioning a lump of threes, tens and thirties which less than a week ago looked like being postponed due to default.
Despite the weaker US dollar and manipulated Swissy the Aussie has come off a bit more, by 0.3% to US$1.0757, with the risk trade still looking dicey at this point.
After yesterday's Bridge Street capitulation, the SPI Overnight rose 12 points or 0.3%.
What can those looking to buy possibly grasp onto at this point? As has been noted, the June quarter US earnings season has been a strong one. It has a long tail, but to date 384 of the 500 S&P stocks have reported, with 77 missing forecasts and 274 beating them. Last night 16 S&P stocks reported and 11 beat. The stand-out was electronic transaction facilitator Mastercard – not a bad consumer bellwether – which beat by so much its shares jumped 13%.
Go figure.
Are there simply too many Chicken Littles out there?
Rudi will appear on Sky Business today at noon.
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