Daily Market Reports | Mar 14 2012
By Greg Peel
The Dow rose 217 points or 1.7% to 13,177 while the S&P gained 1.8% to 1395 and the Nasdaq added 1.9% to 3039.
What a difference a day makes. On Monday, the Australian market was looking tired and did not like the sound of China's big trade deficit. On Monday night, Wall Street pushed higher but led by defensives, while financials and tech stocks drifted off. I noted in yesterday's report that some form of positive surprise appeared to be needed if the Dow were to push through the 13,000 mark.
Then yesterday, suddenly Australia's market was very buoyant. What had changed? Nothing in particular. Maybe the fact Wall Street hadn't responded poorly to the Chinese data meant a catch-up was required, but improving momentum during the day pointed to something a bit more solidly grounded.
Perhaps now, after last night's trade on Wall Street, we know. It is as if a decision was made over the last 24 hours that with Europe seemingly settled for now, China slowing but not drastically, and the US economy improving, it might be time to buy. Starting downunder.
Wall Street opened a bit higher, but it was no big step-jump. The February retail sales numbers were then released and there had been some concern rising gasoline prices may have taken their toll. But at a 1.1% gain, sales were in line with expectations. Moreover, both the January and December numbers were revised upward – something economists had not been expecting. The indices began to draw out an upward path.
And that's something a little different in this day and age. We haven't had as many big moves in late 2011 and early 2012 as we suffered in previous years, but when they occur it's usually in one big immediate price adjustment, most often based on some headline, with that headline usually coming from Europe. But Europe's gone quiet and on the strength of the retail sales numbers, Wall Street simply started to rally the old fashioned way.
The Dow pushed easily through the 13k barrier and was up about 150 points when early in the afternoon the Fed released its policy statement following the FOMC meeting.
The Fed reiterated the US economy was expanding “moderately”, which had been an upgrade from 2011's “modestly”. But this time labour conditions have “improved further”, unemployment has “declined notably”, and household spending and business investment have “continued to advance”. Gasoline prices have risen but inflation remains “subdued”. Global strains (ie Europe) have “eased” although “significant downside risks” remain.
It is well understood that Ben Bernanke does not want to make the same mistakes made by Japan in the nineties and the US in the Depression, and that is to turn off the liquidity taps too early. With perhaps those “significant downside risks” still a good enough excuse, the Fed reiterated that the funds rate would remain at zero until 2014. The statement also suggested “Operation Twist”, in which shorter dated mortgage bonds and other assets are rolled into longer dates, will continue, but there was absolutely no reference to anything pertaining to QE3.
Is that bad? Well, the Dow had a little stumble, but when we consider that if QE3 is no longer needed that can only be a good thing, then really the Fed statement was a positive one. Wall Street was not given time to stop and think.
For the past few days the Fed has been conducting its annual bank stress tests to determine whether US banks are sufficiently capitalised and in a sound enough position to weather major macroeconomic shocks. Last year most banks only just scraped through, albeit the Fed's test criteria are noticeably more stringent than the oft criticised European equivalents. Under the new rules, US banks cannot move to increase dividends or indulge in capital management without the Fed's stress test green light.
Analysts have been expecting that this year, given huge piles of cash, the banks would be able to increase their dividends and maybe buyback some stock. The Fed was due to release its test results either tonight or Thursday but suddenly, at 3pm, an announcement hit the wires from the most sound of all US banks, JP Morgan. JPM announced a dividend increase to US30c from US25c and a US$15bn share buyback.
And then it was on for young and old. US financial stocks, which had already been positive on the day, surged. JPM has closed up 7% but rallies of at least 5% were common across the sector. Even the more troubled Bank of America, which quickly announced it would not be increasing its dividend, saw solid buying. Traders are looking now for Citi to follow JPM, and believe Goldman Sachs might also be a big stock buyer. At the end of the day, the market had expected a JPM dividend increase and buyback, but only to US28c and nothing like US$15bn.
The ultimate 217 point rally in the Dow is the first 200+ gain in 2012. While individually the Dow has seen 13k previously (the pre-GFC high is over 14k) and the Nasdaq has seen 3k previously (in the dotcom bubble), never before has the combination been seen.
We recall that it was better than expected US bank earnings that turned Wall Street around in early 2009. But that was after the massive GFC fall. This time Wall Street has already been up 20%, so can it continue to rally? There are suddenly a lot of smiles on dials. Volumes last night, while by no means spectacular, were much better than in recent sessions.
Noticeably, the rally in stocks was matched by a sell-off in US bonds last night. The ten-year yield jumped 8 basis points to 2.11%. Was this short-coverers caught out by no QE3? Or a genuine switch from “risk off” bonds into “risk on” stocks? Perhaps the little spanner in the works here is the VIX volatility index. It fell to below 15 last night – to 14.87. The last time the VIX was that low was in 2007, and we all know what happened in 2007. However the VIX sat in the mid-teens all the way from 2005.
The US dollar index unsurprisingly saw a kick last night, up 0.5% to 80.22. Solid economic data and no further printing being touted. The offset to this is gold, which fell US$28.90 to US$1671.60/oz. Relief for the Aussie too? Unfortunately not. It remained steady at US$1.0525. Why will the Aussie not fall? See today's upcoming article “The Aussie: Still Just A Commodity Currency?”.
Base metals were shut in London when the JP Morgan news hit the wires, but the “risk on” drive up to that point had all metals up 1-2%. Oil can of course be the real enemy of a potential stock rally, and last night Brent was up US80c to US$126.14/bbl and West Texas was up US40c to US$106.74/bbl.
The SPI Overnight was up 43 points or 1.0%.
We'll learn just how the Australian consumer is feeling when Westpac's confidence survey is released today.
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