FYI | Sep 07 2007
By Greg Peel
An Israeli aircraft reportedly dropped “munitions” inside Syrian territory last night, drawing fire from Syrian air defence. That’s about all we know, as other than Damascus railing about “sovereign territory” everyone else has gone very hush hush.
Whatever the story, it was never going to be bearish for either gold or oil. Oil for October delivery closed up another US57c to US$76.30/bbl, aided by news of tighter inventories. It was only last week or so that the oil price was threatening to slip back towards US$60/bbl on fears of a US economic recession. It has powered toward new highs ever since.
Spot gold closed up US$13.30 to US$694.70/oz as its chart break was endorsed by fresh fund buying. The fourth day of the working month is traditionally the day funds enter the market. Middle East tensions, the rising oil price, and another US dollar fall against the euro and pound all assisted in pushing gold along. Comex gold for December delivery jumped US$10.90 to close above the psychological US$700/oz resistance level at US$701.60/oz. Are we on this time? Where are the central banks?
The US dollar fell against the euro and pound as both the European Central Bank and the Bank of England elected to hold rates steady. This was not a great shock, although in the scheme of things any outcome from Brussels could have been explained away. Trichet had been vigilant on inflation, and a rate hike was still a slim possibility, although hints had been dropped that “on hold” might be the best course at present. By the same token, as frozen global credit markets have the Fed almost a certainty to lower rates on September 18, an easing from the ECB would not have been an inordinate surprise either.
As it was, rates remained steady and the US dollar was sold off on the assumption the same will not be true for the Fed. However, the market benchmark yen fell against the US dollar last night, continuing its topsy-turvy affair with risk appetite. This is one factor that allowed the Dow to rally. It also pushed the Aussie higher again – to US$0.8291.
The Dow closed up 58 points or 0.4% having troughed early down 31 and peaked up 93. The S&P put on 0.4% and the Nasdaq 0.3%.
Early weakness in US stocks was largely a hangover from the day before and related to the ever deteriorating global credit situation. But data flowed throughout the day that evoked a good deal of head scratching. Arthur is ready to buy on positive economic news because it reduces the chance of a recession, while Martha wants to sell on good economic news because it reduces the likelihood of a substantial rate cut.
For starters, oil and gold stocks were pushed higher on spot prices. Then came August same-store sales for the likes of Wal-mart and co. Here comes the bad consumer news, traders assumed.
But it wasn’t. The market expected a mere 1.5% rise in sales for Wal-mart but 3.1% was registered, helped along by healthy “back to school” activity. Other retailers posted healthy results. The data was anti-recessionary, but critics argued that 3.1% is not so flash anyway and “back to school” involved a lot of price cutting.
A big surprise was that weekly jobless claims actually fell slightly, for the first time in seven weeks, and that productivity in the second quarter jumped to a better than expected 2.6%. While the latter figure is a bit stale, the dole queue is very much a “timely” indicator.
Bad news came in the form of the number of homeowners beginning the foreclosure process. The figure rose to 0.65% and was the third consecutive quarterly rise and an all time high. This is a stale number, but an ominous one. Imagine what the third quarter may bring.
So what do you do with all that? Well, the retail sector performed well as did gold and energy. But then a higher oil price is bad news for consumers and the higher gold price reflects a weakening dollar. There were also decent moves in the materials (resource) sector. Base metal prices rebounded slightly from two days of weakness but the big news was a rumour that heavyweights BHP Billiton (BHP) and Brazil’s CVRD were planning to gang up and take rival Rio Tinto (RIO), smash it up, and distribute the spoils. That news broke late yesterday afternoon in Australia, helping to reverse a weak equity market.
But while the mood gained a more positive hue on Wall Street last night, there remains the underlying problem of a frozen credit market. LIBOR pushed higher yet again, and the Fed made its biggest liquidity injection in weeks – US$31.25bn – through three repos. Australia’s RBA has also been in on the act lately, offering to take mortgage-backed securities as collateral in an attempt to stem the rising bank bill rate.
The Fed also reported that 3% of commercial paper was unable to be rolled over during the week. While this figure may seem small, it will not be long before the frozen credit market starts leading to insolvencies. A lower discount rate has done nothing. Will a lower cash rate succeed? Sceptics are not convinced of that either.
The SPI Overnight managed only a 6 point gain, ahead of what will likely be a quiet day on the local bourse. Australia’s financial hub – Sydney – is on a “public holiday” for APEC, although market employees will still try to get inside the wire and carry on where possible. Others will likely see an opportunity for a “too hard” long weekend, just as the rest of Sydney has decided.
Happy APEC to all our readers.
