The Great Reflation Continues

[Excerpted from Bill Cara's Daily Report]

The Great Reflation play continued to unfold on Monday. At the closing bell, the S&P 500 (1,002.63 +15.15 +1.53%), the DJIA (9,286.56 +114.95 +1.25%) and the NASDAQ Composite (2,008.61 +30.11 +1.52%) were all sharply higher. As with the Thursday and Monday rallies, the market leaders were Basic Materials (XLB +3.5%) and Financial (XLF) sectors. Consumer Discretionary (XLY) and Energy (XLE) were also strong.

Economic data did play a role on Monday along with the falling US Dollar (77.59 -0.69 -0.88%). But the $USD has sunk to a new cycle low, with prospects of a further decline to 74, and that picture took on some clarity after 3:00am ET in the early morning yesterday.

At 10:00am, the Institute of Supply Management showed a better than expected July reading of its manufacturing index. The ISM index, which is based on a survey of purchasing managers, is considered a strong indicator of future Gross Domestic Product (GDP) movements. Analysts had expected the index for July to rise, and it did, but it also showed a better than forecast reading of 48.9. Results below 50 mean the US economy is still contracting, but traders are noting the improvement.

Also at 10:00am, the construction spending report for June from the Commerce Department showed spending rose +0.3%, better than the expected decline of 0.6%, and compared to a decline of 0.9% in May.

Among industry groups, the strongest were the Oil Services, Hospitals and Goldminers ($OSX+4.6%, $RXH+4.5%, and $XAU+3.3%).

For Cara 100 company stocks, 93 were higher and nine of the top ten gainers were non-US based companies. Brazil's Embraer (ERJ +12.3%) was flying. There were 52-week highs for TTM, ABV, SBUX, and INFY.

I also noted that Department store Target (TGT -1.3%) was soft, and will be watching to see if Walmart (WMT) follows suit today.

Non-Cara 100 Ford was up +4.1% to $8.33, after hitting a 52-week high of $8.86 earlier in the session. Ford shares are up +275% this year. Monday’s report that July sales were up +2.4% from a year ago, the first year-over-year monthly gain since November 2007, traders seemed to ignore the (unsustainable) reasons being the “Clunkers for Cash” marketing agenda.

Against the falling Dollar was the Yen (105.59 +0.64 +0.61%). Interestingly, the Euro (143.68 -0.50 -0.35%), Pound (169.29 -0.04 -0.02%) and Canadian Loonie (93.44 -0.35 -0.37%) were all losers against the Dollar, so yesterday was a Yen:Dollar move.

Commodity prices soared as the dollar slid. Crude Oil (WTIC 71.58 +2.13 +3.07%) continued to lift as did $GOLD (956.20 +2.10 +0.22%). All this price action in commodities started early this past Wednesday as the $USD began to weaken. $GOLD had a +19.80/oz pop in Friday trading, and traders are targeting $1,000/oz this week.

The commodity-price sensitive Canadian equity markets were closed on Monday and will likely play catch-up today.

The US long bond ($USB 117.59 -1.41 -1.18%) was weak after four straight up days. Perhaps reflecting the enormity of the funds raising objectives in the near future, Treasury yields for the 30-year (4.422 +1.11 +2.57%), 10-year (3.639 +1.38 +3.94%) and the 5-year (2.669 +1.36 +5.37%) instruments lifted. The Treasury bill yield was unchanged (0.175) a third day in a row.

Earlier Tuesday, Austral-Asian markets closed mixed: Japan’s Nikkei 225 (10,375.0 +0.22%), Shanghai (3,471.4 +0.26%), Hong Kong (20,796.4 -0.05%), Australia (4,313.9 +1.02%) and India (15,831.0 -0.59%) were mostly quiet.

The European bourses opened lower Tuesday, however: the French CAC (3,453.4 8:27AM ET -0.70%), German DAX (5,378.9 8:13AM ET -0.88%) and FTSE 100 (4,641.1 8:13AM ET -0.88%) were all down.

The spot (cash) market, with the Euro stronger after 8:00am ET, saw the price of gold, palladium, platinum and silver gap strengthen (until about 9:15am ET): (955.86 +1.10 +0.12% 08:28am ET); (269.0 -2.0 -0.74% 08:28am ET); (1230 -2 -0.16% 08:28am ET); and (14.30 +0.06 +0.42% 08:28am ET), respectively.

The US equity market opened down as well. The DJIA, which had closed Monday at 9286.56, opened with selling that took the index to 9252 before lifting 9275.

Comments

[manya05:]

What reflation? people keep forgetting, if you live in the US, you are submerged in a dollarized economy. The market may be going up, but it will not compensate for the falling dollar and concomitant loss in purchasing power (in fact, at best it will keep even). So unless you buy something made in the US with 100% labor (I can think of a few things not suitable for printing), then you lost yesterday, you just got a little deeper in the hole when seen from outer space. Who wins with this reflation? Not me.

Aug 04 10:41 AM