Daily Market Reports | Oct 07 2011
By Greg Peel
The Dow rose 183 points or 1.7% while the S&P gained 1.8% to 1164 and the Nasdaq added 1.9%.
And then there were two. Last night the Dutch parliament passed the EFSF bill leaving only Malta and Slovakia to hold their votes early next week. The trick will then be what to actually do with the E440bn fund. We know that European leaders finally agree that bank recapitalisation ahead of an orderly Greek default is the necessary plan, but the details of that plan are yet to be determined.
The expectation is that the details are now being nutted out and will be presented at the EU summit on October 17. This leaves another ten days of room to disagree, bicker and disrupt, but one gets the felling Europe has finally figured it out. Figured out, that is, that it's time to show a united front. No end of damage has been done to reputations in the past two years, but then one can hardly look to the US as a role model either.
Last night Jean-Claude Trichet held his final press conference before the end of his eight-year tender as ECB president. Previously markets had assumed the ECB would cut its cash rate in the face of the turmoil but Trichet had poured cold water on that idea, and true to form he left the ECB cash rate steady at 1.5% last night. However he did announce a raft of other “unconventional” policy measures.
Those measures are described as “tried and trusty” by the Wall Street Journal given Trichet is reverting to strategies put in place in 2008 after the fall of Lehman. We must recall at this point that the eurozone does not have a common bond to replicate the US Treasuries or UK gilts for example, so any form of quantitative easing has to be more imaginative than just printing money to buy sovereign paper.
The ECB will restart its program of buying covered bank bonds next month and will hold two separate tenders of one-year refinancing for eurozone banks. Echoing the Fed's new policy of specifying timing, the ECB will provide banks with as much liquidity as they need until at least July 2012. In other words, we might now be able to assume that whatever happens on the default front, from Greece to anyone else, European banks will not crash under the weight of losses.
Where will this funding come from? Well that's where the EFSF comes in. It has long been noted that E440bn might cover Greece, Portugal and even Spain but not Italy, but we are yet to find out what sort of leverage will be applied to the EFSF and what sort of complex system will be put in place to feed the ECB. But perhaps the salient point here is the message European officials are now sending to the so-called “bond vigilantes” – a message which basically suggests “we're bigger than you are so you might as well back off”. For two years we have seen nothing but band-aid measures to support Greece and the other PIIGS which have not been sufficient to prevent financial markets from undermining the capacity of the peripherals to finance their budget deficits.
The Poms also got into the act last night. There's been a lot of thigh-slapping around The City of late as the British have reflected on their sensible decision not to join a common currency which has brought its continental neighbours to their knees more effectively than Nelson could ever have managed. And there has also been talk of leaving the EU. But the UK has not been immune to the goings on in Europe and its economy is feeling the fallout. Last night the Bank of England announced a 75bn pound increase to its asset purchase program to 275bn pounds, which has been dubbed a British “QE2”.
The decision by the ECB not to raise rates last night meant the euro rallied, despite the implications of QE in the announced ECB policies. This meant the US dollar could stop rising for once and instead it fell 0.5% to 78.54 in its index. The move took the pressure off commodity prices, and as such we saw metals surge in London, with copper up 4.5% and tin 7% amongst the positive moves.
Oil chimed in, with Brent up US$3.00 to US$105.73/bbl and West Texas up US$2.91 to US$82.59/bbl. Silver was up 5%, and gold quietly moved US$8.90 higher to US$1648.40/oz.
Aside from a rolling stream of positive news out of Europe, last night Wall Street learned that the big chain stores saw their sales rise 5.8% in the September back-to-school season. Heavy discounting helped, but economists had expected only a 4.9% gain. And last week's new jobless claims rose by only 6,000 to a one-month average of 401,000 when economists had expected 410,000.
Such data underscore a commonly held belief that if you take the European effect out of the equation, the US economy is not faring as badly as many have assumed. Talk of a double-dip recession has now eased.
Australia was also pleasantly surprised by its latest retail sales data released this week, and yesterday's session was certainly a cracker. Indeed it was the biggest up-day since December 2008. Praise the Lord and pass the retsina – it's beginning to look a lot like a rally.
We should probably remember, however, that the December 2008 rally soon gave way and the GFC low was not established until March 2009. Then, too, there was a honeymoon period as the world revelled in the TARP but soon the party faded and champagne went flat. The question thus is: is what we are now seeing just another honeymoon session ahead of an inevitable hangover?
I believe it's important to note that a significant feature on Wall Street in late 2008 and early 2009 was “redemption window” selling. Small equity investors in the US were leveraged to the gills before the GFC and could only watch helplessly as stock prices crashed given the funds they were invested in only allowed redemptions during specific quarterly windows of time. They had to wait until those windows opened, and then they pulled their money out in droves. This meant those funds had to sell underlying stock positions, and they did so relentlessly, day after day, in the period in question. Some funds had even frozen redemptions initially, so unfreezing meant further selling into 2009.
I hate to use what is usually a kiss of death expression, but this time it's different. This time not only have most investors shied away from the levels of leverage which had them in so much trouble in the GFC, they have mostly shied away from the stock market altogether. And so have the mutual funds, which are currently holding record levels of cash. And this time not only are US corporates not geared to ridiculous levels, they're sitting on mountains of readies. This time there is no desperate need to sell out of the stock market in the face of looming bankruptcy.
Such a position would then suggest that not only does this market not have the same scope to fall, it has a much greater scope to rise. Because if we can get through this (hopefully) final period of European decision-making and policy implementation unscathed, then there is an awful lot of money in the US in particular earning negative real interest on unallocated cash. If the market starts to move and the mutual funds begin to feel they're being left behind, look out.
So enjoy, but bear in mind we really are in a honeymoon phase right this very moment in which the covering of short positions is playing a major part. When they're cleared out, the next move may yet be down again before we can really, honestly, call the bottom.
The SPI Overnight was up another 68 points or 1.7%.
For those who were wondering, Apple shares closed down a mere 0.1%. In the US tonight, attention swings back to those other jobs.
A reminder that Rudi will be making his presentation, “Helping Investors Adapt To Changing Markets” at the Melbourne Trading & Investing Expo today and tomorrow at 3.45pm at the Melbourne Convention & Exhibition Centre, Seminar Room 2.
I'd steer clear of the Sydney CBD from lunchtime on today – there'll be a lot of thirsty stockbrokers getting on it.
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