Daily Market Reports | Nov 01 2011
By Greg Peel
The Dow fell 275 points or 2.3% while the S&P dropped 2.5% to 1253 and the Nasdaq lost 1.9%.
Last night was the last day of the month on Wall Street which in itself can offer potential volatility while October has seen the biggest points gain in the S&P 500 since January 1987, which in itself offers obvious profit-taking encouragement. One might be content to use these excuses alone to explain the sudden big plunge on Wall Street last night – accelerating to the close – but there was a lot more than that going on.
For starters, the Dow opened down a couple of hundred points right from the bell and hovered around that level for all bar the last half hour of the session. While the last half hour may have represented profit-taking the step-down from the bell was more about Europe rearing its ugly head once more. Before we get to that we must note that late in the Asian session yesterday the Bank of Japan intervened in currency markets in yet another attempt to rein in the soaring yen.
The result was a 5% surge in the yen, as it fell (rose in USD terms) to Y79.50 from Y75.80. Both the US dollar and euro rose sharply in relative terms. However, the euro had its own fish to fry, and thus weakened over the session against the greenback as well. The end result was a US dollar index up a full 2% to 76.55.
The predominant reason for euro weakness last night relates to the same old festering sore. I had noted last week that following the outlining of the plan to save Europe every asset class moved significantly in an appropriate direction but there was one glaring exception – the yield on the Italian ten-year bond. The reason for the recalcitrance of this particular asset is rooted in scepticism over the size of the EFSF and bank bail-out allocation and its capacity to cover all of the eurozone basket cases all the way to the “whale” – Italy. Greece, Portugal, Ireland even Spain can most likely be handled, but Italy's sovereign debt levels are simply too big, particularly if Italy is the last in a row of falling dominoes.
To make matters worse, Italy's president Silvio Berlusconi is not taken seriously by anyone outside of Italy, and his support is also spurious within Italy. Last week Berlusconi had to get down on his knees before the troika and promise that the Italian government would introduce new strict budget measures. He had made a similar promise a month earlier before proceeding to do zip. There is concern such budget measures will not be passed by the Italian parliament. There is speculation Berlusconi may not survive. Whether or not the latter is a good thing or a bad thing is up for debate, but the bottom line is we have still not shaken off fear and uncertainty in Europe.
Last night the Italian ten-year bond yield traded over 6% to reach its highest level since the euro was introduced. That level is considered the line in the sand beyond which Italy cannot afford to roll over its sovereign borrowings. It is a level beyond which suggests Italian default.
Those outside of Europe have spent the last few months hastily toting up their European sovereign debt exposures and mostly declaring to all and sundry that they are limited and manageable. The bulk of the holdings are with European banks. But having posted a very big profit miss last week, which saw its shares then plunge significantly, US-based brokerage MF Global last night filed for Chapter 11. MFG has listed assets of US$41bn and debts of nearly US$40bn of which US$6.3bn represents holdings in the sovereign debt of Ireland, Portugal, Belgium, Spain and Italy. Note the obvious omission.
The demise of MF Global is not of itself a major concern to Wall Street. The real concern is: who's next? The path to Lehman in 2008 began in 2007 as the first small dominoes fell. Last night's activities will provide food for thought for the G20 leaders as they meet on Thursday and the eurozone finance ministers as they meet on Sunday.
The enigma that is gold fell US$26.10 to US$1717.60/oz last night on the US dollar's jump. One might think that gold should have rallied on this re-emergence of risk but then gold has done nothing but rally since the European package was announced, most likely anticipating further fiat currency devaluation. The Aussie similarly lost 1.7 cents to US$1.0528 but commodity prices were not as impacted as one might have assumed.
Copper fell 2% to mark the biggest fall amongst the base metals. Brent crude lost only US35c to US$109.56/bbl and West Texas US91c to US$92.41/bbl. Risk aversion was more apparent in bond trading, which saw the US ten-year yield fall 9 basis points to 2.12%, having seen 2.40% last week, and the German equivalent trade similarly.
The Australian market suffered its own bout of end of month weakness yesterday so the SPI Overnight has only fallen 39 points or 0.9%.
In an action-packed day today locally, we will see the release of the Australian and Chinese manufacturing PMIs, the RBA will make a rate decision which really could go either way, and some horses will go for gallop. PMI releases will follow around the globe and lead into tomorrow night when the Fed will hold its monetary policy meeting and press conference, before which the ADP number will provide clues to Friday's US unemployment figures.
And no doubt Europe will continue to dominate market disposition for the rest of the week.
Where the hell's that fat lady?
Rudi will make an appearance on Switzer TV (Sky Business) tonight between 7-8pm.
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