Daily Market Reports | Oct 06 2011
By Greg Peel
The Dow rose 131 points or 1.2% while the S&P gained 1.8% to 1144 and the Nasdaq added 2.3%.
European stock markets had already closed on Tuesday when a report came through that European finance ministers were looking to recapitalise the region's banks ahead of a more severe but orderly restructuring of Greek sovereign debt. Wall Street shot up in a heart beat on the news and last night European markets had their chance, with London's index rising 3%, France's 4% and Germany's 5%.
Adding to optimism was a statement from German chancellor Angela Merkel last night in favour of bank recapitalisation. Little can be achieved in the eurozone without the support of the German government. Markets are now hoping that a plan will be unveiled at the next European Union summit to be held on October 17.
Markets are also likely to be further comforted when the three remaining parliaments – those of the Netherlands, Malta and Slovakia – pass the EFSF bill, finally ratifying its size and structure. There has been talk of Slovakia being against the idea, but one wonders whether the dirt-poor Slovaks can really see an advantage in seriously pissing off the entire world. Merkel subtly put a rocket up the three laggards last night, entreating them to get on with it.
Wall Street opened last night still reeling from Tuesday's late 350 point Dow rally and no doubt wondering what to do next. News that the September services PMI had fallen to 53.0 from 53.3 in August was not cork-popping stuff but the result still implies expansion in the sector which provides 80% of US output and that does not signal recession. Better news came in the form of the ADP private sector jobs result for August which showed a gain of 91,000 jobs compared to expectations of 75,000. Wall Street is now hoping for a better non-farm payrolls number for September, due tomorrow night, following August's disaster.
Global services PMIs have rolled in over the last 24 hours, albeit China's was posted on Monday. It showed an increase to 59.3 from 57.6 which is a very solid and expansionary result, again calming fears of a rapid Chinese slowdown. Australia's was a little disappointing on a fall to 50.3 from 52.1 but at least it's still the right side of the line – just.
The UK liked its increase to 52.9 from 51.1 but the wet blanket was the eurozone, which saw a fall to 48.8 from 51.5. But really, are we shocked? The eurozone also publishes a “composite” PMI which collates all of the manufacturing, services and construction numbers and it fell to 49.9 in September from 50.2 in August. It's only just on the wrong side, but it's the first indication of general contraction since June 2009.
Europe is looking at a recession – we know that.
After absorbing the economic data Wall Street decided it was still time to buy, albeit last night's volume was only about half of that seen on Tuesday. The bulk of the volume on Tuesday was accumulated when the Dow was pushing southward, while the last half hour's extraordinary rally occurred largely in a vacuum. This is not the stuff of major bottoms, but then we cannot call a bottom until the latest developments in Europe are played out and a definitive solution is bedded down. So realistically we're only now looking at short-covering and a backing away from the sellers rather than a wholesale assault from the buyers. Given Europe's track record of dithering, dallying and delaying, no one much will be brave enough to call the opera over until the fat lady has sung, taken her bow, accepted her flowers, changed out of her costume and is in the green room guzzling the bubbly.
October 17 will be an important date if we can really foresee the EU summit providing the Great Rescue Plan. What are we up to? Plan M, N, O? Prior to the summit – next Tuesday to be precise – Alcoa will release its September quarter earnings result and in so doing officially kick off the US quarterly earnings season. High hopes are still being held for good results to be posted, but the concern is just how bad Q4 and 2012 earnings guidance may be from company managements.
We must remember, nevertheless, that it's always better to talk down guidance and then post an upside surprise than it is to talk up guidance and then disappoint the market.
Before we get to next week, tonight the ECB will make a rate decision. Expectations here have taken somewhat of a back-flip given a rate cut is no longer expected. Only last week commentators were talking at least 25 and maybe even 50 basis points, but rhetoric from Trichet in the meantime has rather poured cold water on those expectations. It is nevertheless expected Trichet will announce other quantitative easing-type measures such as further sovereign bond purchases, and hopefully his legacy, at his final press conference as ECB president, will be to announce a new collateral facility as part of the bank recapitalisation plan.
The fact that it is Trichet's last policy meeting before his tenure expires has been cited as why he would not reverse the rate rise he implemented only a few months ago. He might look like a fool. Some might say it's a bit late.
Base metals trading had already closed on Tuesday before the Wall Street rally although last night's responses were not exactly exciting. Copper was up 1.7% to mark the biggest move in the complex. Oil shot up last night however, with West Texas leaping US$4.11 or 5% to US$79.78/bbl on news of a larger than expected weekly US inventory offtake. These weekly numbers are about as useful as the weekly jobless claims numbers (ie not) but Brent still managed a US$2.94 rise to US$102.73/bbl.
The Aussie risk indicator has put in a solid recovery, rising a cent to US$0.9652 when the US dollar index fell only 0.2% to 78.94. Gold found some buying again, rallying US$22.30 to US$1639.50/oz. The US ten-year bond yield jumped another 12 basis points to 1.90%.
The SPI Overnight was up 69 points or 1.8%.
Rudi will be appearing on Sky Business at noon today and then he's off to Melbourne for the Trade Expo tomorrow and Saturday. Mexicans are cordially invited to rock up and catch Rudi's presentations.
The Melbourne Expo means FNArena's fortnightly chart-topping live show, Market Insight, will not be seen today but rather it has been shifted to next week.
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