Sentiment is Changing

December 9th, 2008  by Cale McCulloch

Closing Data

	current	change	%
Dow Jones	8934.18	298.76	3.5%
NASDAQ	1571.74	62.43	4.1%
S P 500	909.7	33.63	3.8%
FTSE 100	4300.06	250.69	6.2%
Nikkei 225	8329.05	411.54	5.2%
SPI Futures	3617	-26	-0.7%
All Ords	3,554.00	126.6	3.7%
Oil	43.69	2.68	6.5%
Gold	769.3	17.1	2.3%
Silver	9.975	0.545	5.8%
Aluminium	1446	-98	-6.3%
Copper	3050.5	-310	-9.2%
Lead	915	-85	-8.5%
Nickel	9080	25	0.3%
Tin	11585	-120	-1.0%
Zinc	1096.5	-38.5	-3.4%

Back to back rallies on Wall Street have brought a change in sentiment to the markets, from the choppy short term moves to a semi-sustained move north. The Australian market is set to rally strongly on the open today, with the SPI trading up almost 100 points, following a 4% rally yesterday. Australian investors took heart in Friday nights rally and used the opportunity to play catch up with international indices after last weeks lack lustre performance.

Although there was no data out last night, the global rally took the Dow to a 1 month high.

Energy stocks have rallied around the globe as traders took advantage of a Contango (arbitrage) trade that presented itself as a result of the difference between spot Oil and that being sold 12 months forward. Even the Oil producers were getting involved with some anchoring super tankers and locking in 11% profits for the sale of that delivery 12 months forward, after holding costs that is. Add to this is the imminent threat of a cut to production by OPEC when they meet on December 17, which a spokesman for the cartel said may surprise the market (i.e. a big cut). These two factors, together with the onset of the northern winter, sparked a recovery in the price of crude which is likely to continue from here.

As a constant reminder that the markets are not functioning as they used to, we are seeing money flow into both equities and Gold at the same time.  This is arising from the amount of cash sitting on the sideline and shows a returning appetite for risk.  Global investors are seeking somewhere better to place money than in US T-bills, they are virtually paying the government to hold for them (not the other way around). This will be something to keep an eye on, as Gold is normally sought out as a safe haven from financial crises and also as a hedge against inflation. If positive sentiment continues to return to the market, we will see a turning point in the price of Gold, as investors become more risk seeking and hence, begin to shift from Gold into Equities.

There is a lot of Tabloid journalism at the moment about the Australian governments stimulus package, and criticism about the so called “once off injection” effect that the amateur economists seem to think it will have on the Australian economy. So I thought I would take this opportunity to explain the basic economics that the stimulus package is built on. It is called the multiplier effect, and very simply relates to the way spending flows through the economy (not just being spent once and stopping there), having a multiplier affect on aggregate spending throughout the economy over time. In it’s simplest form it involves you spending a dollar at the baker, who then pays his bills with a proportion of the dollar and spends, say 60c at the butcher…. And on it goes, hence the “buck” wont stop at the initial receiver. Although there will be a significant number of people using the cash to repay some debt, by doing so they are essentially freeing up room on the credit card for future spending anyway, as well as repaying some of what has already been spent in anticipation of the new fundings arrival (this may partially explain the increase in retail sales for November). The government has made a move in the right direction, easing the pressure on struggling Australians.
           
Enjoy!

Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.

< Return to Market Fox home