Politics Takes Center Stage in Capital Market Activity

[Excerpted from Bill Cara's Daily Report]

With the FOMC policy decision reported at 2:15pm ET Wednesday and traders focusing on the very important G-20 meetings getting underway in Pittsburgh Thursday, politics is front and center in capital markets, and some of those became what traders call fast markets. Crude Oil ($WTIC 68.97 -2.79 -3.89%), for example, plunged in a 30-minute selling spree in the morning, and the US Dollar ($USD 76.33 +0.25 +0.32%) briefly soared and Gold bullion contracts ($GOLD 1,008.20 -6.30 -0.62%) plummeted momentarily. Equity prices snapped shortly after the Fed reported. The issue apparently has to do with Permanent Open Market Operations (POMO) and whether the US Treasury is any longer capable or interested in sustaining a low interest rate debt market supporting, bank supporting, equity market supporting interventionist policy that is whacking the Dollar.

At the 4pm ET close in New York, the markets ended on a bearish note. The S&P 500 (1,060.87 -10.79 -1.01%), DJIA (9,748.55 -81.32 -0.83%), and NASDAQ Composite (2,131.42 -14.88 -0.69%) all closed sharply lower than at 2:39pm ET with the S&P 500 (9,906.73 +76.86 +0.78%), DJIA (9,906.73 +76.86 +0.78%), and NASDAQ Composite (2,166.02 +19.72 +0.92%) showing the usual green.

This was not a page out of the October 19, 1987 Black Monday book, however, and markets have stabilized this morning, but it was clearly a shot across the bow.

The Canadian markets sold off relatively less than the US market. The Toronto Exchange Composite (11,517.54 -68.19 -0.59%) and Venture market (1,277.85 -3.78 -0.29%) gave back only a small part of the prior day’s gains.

Leading on the downside in NY were the two largest capitalized industries, Energy and Financial (XLE -2.1% XLF -2.0%), but the good news is that these were the laggards immediately prior to the FOMC announcement, and there was no major rotation among sectors, so this pull-back was a broad market move, which is usually a reaction and not a deeper rooted strategic move.

There were no strong sectors on the day.

Among the few relatively strong industry groups were the Semi-conductors ($SOX +0.5%) and Computer Hardware ($HWI +0.3%). The weakest were Airlines ($XAL -4.3%), REITs ($DJR -3.9%) and Goldminers ($XAU -3.1%).

The Airline industry group is obviously being played as a market hedge. For several days now, the normal relationship of the Airline share prices moving in mirror image with Crude Oil prices has been exactly the opposite. As Crude Oil prices zoomed, so did the Airlines, and as they fell sharply, so did the Airlines. So speculative money presently has control, which is a reason, among many, we call the market presently frothy.

For the Cara 100 company stocks on Wednesday, there were only 15 winners. Electronic Arts (ERTS +7.1%), which zoomed on a Microsoft take-over rumor, and chip makers Linear Tech (LLTC +2.5%) and Intel (INTC +1.8%), managed to hold earlier gains.

The losers were led by Black & Decker, Starbucks, Gerdau Steel, Kinross Gold, Suncor and Vimpel Communications (BDK -4.3% SBUX -3.8% GGB -3.7% KGC -3.4% SU -3.4% VIP -3.4%).

As the US Dollar lifted, so too did Treasury Bonds. Bonds became a safe-haven play with capital flowing out of equities. The US long bond lifted ($USB 119.69 +0.53 +0.45%) as yields dropped on the 30-year (4.195 -0.13 -0.31%), 10 year (3.418 -0.38 -1.10%), and 5 year paper (2.375 -0.50 -2.06%). Interestingly, however, yields were lower and bond prices stronger earlier in the day.

With the $USD up for the 4th day in five, the Euro (147.31 -0.61 -0.41%), Yen (109.55 -0.17 -0.15%), Pound (163.48 -0.06 -0.04%), and Canadian Dollar (93.00 -0.56 -0.60%) all closed down. But the losses were all much smaller than the prior day’s gains..

Earlier Thursday in overseas equity markets, the action was mixed. Australia (4,708.0 -0.70%), Shanghai (2,853.6 +0.38%), Hong Kong (21,050.7 -2.52%) and India (16,787.6 +0.41%) went in different directions, but less so in countering the prior day’s moves. The Nikkei 225 of Japan (10,544.2 +1.67%) re-opened after an extended holiday, and got caught up to the recent gains in other markets.

By 6:03AM ET, France (3,812.9 -0.23%), Germany (5,687.6 -0.25%) and the FTSE 100 of London (5,129.1 -0.20%) were slightly weaker. Traders there and everywhere are awaiting word from the G-20 meetings.

Traders are also closely watching the forex market where the Euro was a bit softer (1.4775 -0.0022 -0.15% 06:10am ET), but almost unchanged. In other futures markets, the DJIA December futures (9717 0 0.00% 06:10am ET) are flat, while the Crude Oil futures (68.51 -0.46 -0.67% 06:10am ET) are trading a bit lower.

The precious metals market was a little firmer after the pull-back Wednesday afternoon. Earlier Thursday morning, the spot (cash) trades were as follows: for gold (1013.95 +3.83 +0.38% 06:22am ET), silver (16.80 +0.05 +0.30% 06:22am ET), platinum (1322 +1 +0.08% 06:05am ET) and palladium (294 0 0.00% 06:05am ET). Traders are not yet convinced the monetary authorities are about to break the credit bubble, but they are watching.

The dance continues as G-20 orchestra has taken center stage.