Daily Market Reports | Sep 28 2011
By Greg Peel
The Dow closed up 146 points or 1.3% while the S&P gained 1.1% to 1175 and the Nasdaq added 1.2%.
The problem with the highly addictive series In Europe Tonight is that after a while the story lines seem to be a bit familiar, as if the writers were becoming stuck for fresh ideas. After the master stroke of introducing the possibility of a Eurotarp definitive solution to the script, suddenly we're back to the same old scenes.
But then we didn't really expect news of a proposed “solution” would be the end of of it, did we? The bottom line is that prior to last weekend's G20 meeting which appears to have given birth to the Eurotarp concept or something like it, European officials had negotiated a 21% haircut for holders of Greek sovereign debt, being mostly European banks and the bulk of the holdings being mostly French. The fact that the markets have already priced Greek debt down to 50 cents in the dollar would nevertheless suggest that a realistic solution could only be to meet the market and make the haircuts 50%. Otherwise it's just another band-aid on the other band-aids.
And that's the way Germany sees it, with Holland chiming in for good measure. Meanwhile France disagrees, and the ECB does not want to start again on negotiations with bondholders that were so painstaking in the first place. Oh God here we go again. Surely the point of a definitive Eurotarp, whatever form it takes, is to bring fantasy in line with reality and protect the banks first before doing the deed which simply has to be done. That's what the money is intended for. Otherwise the markets will affect their own solution and believe me, it won't be pretty.
News of fresh disagreement in Europe hit the wires late in the New York session last night at a point at which ongoing euphoria had sent the Dow up 320 points despite having risen 272 points the night before. It was credited with taking the wind out of Wall Street's sails, but then again only a fool would have expected the new Eurotarp plan to pass without further inevitable fannying about. There are many reasons why the rally lost its way.
Firstly we can simply suggest it was overdone to that point, exacerbated by short-covering and end of quarter rebalancing back into equities having spent the quarter hiding out in Treasuries. We note that the US ten-year yield was up another 11 basis points to 2.01% having hit 1.67% as its low only days ago. Secondly we can suggest that short-term traders decided a couple of 2% up-days on quickfire longs meant time to take profits. But perhaps we should more realistically note that there are plenty of traders who believe any rally at this point is worth selling into, because it ain't over yet and will probably get worse before it finally gets better.
There was also a rash of very substantial earnings downgrades from bank analysts late in the session for the likes of the your Goldman Sachs and Morgan Stanleys ahead of the US quarterly reporting season, which begins in a couple of weeks.
If we look at yesterday's euphoric trade in Australia, we can also look at short-covering and portfolio rebalancing from funds and we can also wonder why on earth Australia was sold off so heavily on Monday. And we can note that with the Aussie back under parity, US investors have the opportunity for double-whammy upside in buying Aussie dollars to buy Aussie stocks.
We note that the 3.6% gain was the largest single day's effort since December 2008, and then we can note that the market didn't bottom out then until March 2009.
The euphoric turn-on-a-dime was also evident in commodity markets overnight, as commodity funds mimicked their stock market counterparts in just needing to reestablish positions, having dumped them aggressively late last week. At London, where metals trading closed before the late Wall Street sell-off, aluminium rose 2% and everything else was up 4-6%. West Texas crude was up US$4.21 or 5% to US$84.45/bbl.
Brent crude managed only a 3% gain, rising US$3.20 to US$107.14/bbl. A milestone was reached in the European oil market last night as the first post-revolution exports of crude left Libya. This first trickle signals that pressure should now come off Brent crude supplies, which were already otherwise under pressure from waning North Sea supply. We should see some tightening of that Brent-WTI spread now, albeit nothing has changed in Oklahoma where excess storage capacity remains minimal.
Currency-wise, the euro rallied again and the US dollar index fell another 0.3% to 77.75. This, combined with the turnaround in commodity prices and yesterday's rally on Bridge Street, means the Aussie is up another half a cent to US$0.9904. Gold continues to claw its way back on the lower dollar, rising US$20.30 to US$1649.70/oz last night.
Gold nevertheless may be facing a threat on the horizon. On Thursday week the ECB will make a rate decision, and markets suspect Trichet cannot avoid a cut. A move of 25bps is expected, but talk is that 50bps is on the cards. Perhaps the only thing holding Trichet back would be the fact he will look like a complete idiot given he raised the cash rate only months ago around about the time Italy was imploding. But then Trichet really doesn't need any help to look like an idiot.
If there were a 50bps rate cut for the eurozone then the euro would fall, the US dollar would rise, and if there is no need for Europe to seek gold gain as a safe haven then the gold price must surely fall. The offset is that by leveraging the EFSF into a Eurotarp, Europe is basically conducting quantitative easing on a grand scale which suggests monetary inflation and thus support for gold. Gold may now bounce around in a range before the next real move is obvious.
The SPI Overnight was up 28 points or 0.7%.
What Wall Street would dearly love to do is to put Europe behind it so focus can return to the local economy and its problems or otherwise. Last night the Conference Board consumer confidence index ticked up by an insect's appendage, albeit from a very low level. The Case-Shiller house price index for July rose 0.9% but is still down 4.1% year on year. The Richmond Fed manufacturing index rose to minus 6 from minus 10, but is thus still in contraction.
It's very hard to gauge how the world's largest economy is performing when Europe trumps everything. As noted, in a couple of weeks the US September quarter earnings season will begin and there are plenty of commentators who believe earnings forecast must come down in the light of all that has occurred this quarter. Take last night's bank earnings downgrades for example. We might have a bit of a “confession session” over the ensuing period of guidance downgrades. But if we don't, well, then maybe strong US earnings and progress in Europe could be the catalyst this market needs.
Stay tuned.
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