Daily Market Reports | Mar 30 2012
By Greg Peel
The Dow closed up 19 points or 0.2% while the S&P closed down 0.2% to 1403 and the Nasdaq lost 0.3%.
Saudi Arabia's oil minister has been fairly vocal of late and last night the London Financial Times published an op-ed piece by the minister in which he suggested the Saudis “would like to see a lower price” of oil. It is usually the case that when oil pushes above US$100/bbl on a West Texas basis the Saudis come out with commentary to try to push the price back down again. The story is mostly the same: prices above US$100 do not reflect the global demand-supply balance and the difference is simply a premium created by speculators for whatever reason – in this case Iran.
The world's biggest oil producer likes high oil prices, of course, but not so high that demand destruction sets in and the cost of energy threatens global growth. Something around US$80/bbl is more comfortable for the Saudis as a nice balance between profits and a healthy demand side. So when prices run up, the Saudis like to remind everyone that they have plenty of spare capacity and are quite happy to deploy it. This time last year Saudi Arabia boosted its production quota to counter lost Libyan production.
This time it's all about countering lost Iranian exports which are now restricted under international sanctions. Initially oil prices ran higher on fears of Iranian reprisals, but given they never seem to eventuate the oil market also has to heed the Saudi oil minister's protestations. So last night West Texas crude fell US$2.18 to US$103.23/bbl and Brent fell US$1.99 to US$122.14/bbl.
The US energy sector has an influential weighting in the S&P 500 so despite the respite for other sectors, last night's fall in energy stocks helped drive Wall Street lower early on. There was also a slightly weaker than expected result for new weekly jobless claims announced last night, but not enough to be worried about for a volatile weekly data point. The last revision of the US December quarter GDP saw growth remain unchanged at 3.0% as expected.
So we may well argue that the 94 point early drop in the Dow and falls in the other indices were again about taking profits ahead of the end-of-quarter tonight. At their lows last night, the Dow hit 13,032, the Nasdaq hit 3069 and the S&P saw 1391. The first two edged closer to those apparent lines in the sand of 13,000 and 3,000 and this is where buying interest has been sparked in recent trade. After bottoming around midday, Wall Street slowly turned around and retraced its steps. Aside from true bulls, there are funds underweight equities which need to top up their allocations to look good in March quarter reports.
While Wall Street marvels at the best first quarter for stocks since 1998, there is a ghost floating around the trading floors and its chain-rattling and moans have been getting a bit louder this week. That ghost is Europe – the crisis that just loves to keep on keeping on – and after the recent honeymoon investors across the globe have begun to once again look on nervously at European bond yields.
There was a general strike in Spain last night in protest against the Spanish government's austerity measures, and as a pre-emptive message from the people ahead of the release tonight of Spain's new fiscal budget for the the next twelve months. The expectation is that austerity measures will be tightened further to provide one of the harshest budgets the country has seen in thirty years of democracy. Bond traders in Europe have become somewhat nervous ahead of this budget being brought down, and yields on Spanish sovereign bonds have been ticking up again after falling steeply as a result of the ECB's monetary stimulus measures. Last night Spain's ten-year rose 8 basis points to 5.38%, and just to add to the concern, Italy's yields have been rising in sympathy. The Italian ten-year was up 12bps last night to 5.15%.
Recalling that these yields traded over 7% before the ECB stepped in late last year, we are not yet at a place of elevated fear. However, the quiet trend is quietly disconcerting. Despite weak demand for last night's auction of seven-year bonds from the US Treasury, the benchmark US ten-year yield fell 4bps to 2.16%. Two weeks ago that yield hit 2.40% when the Dow crossed 13k and the big bonds to equities switch appeared to be game on.
There's as yet little movement in the VIX nevertheless, which remains stuck at 15. Perhaps we need to get through tonight and into June quarter trade, and then the March quarter US earnings season, before the direction from here becomes clearer.
The euro traded lower last night but the US dollar index ultimately finished square on the session at 79.13. Gold lost US$2.50 to US$1660.60/oz and the Aussie is off a tad at US$1.0382. Base metals were relatively steady other than nickel, which was down 2%.
The SPI Overnight lost 2 points.
One assumes that today's local trade will feel some effect from the close of books.
All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit. Click here.
All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.
