MarketView for November 16

 

 

Summary  

  

Share prices were sharply higher on Monday, sending the key equity indexes to new 13-month closing highs. The move was reinforced by comments from Federal Reserve Chairman Ben Bernanke whose comments gave further credence to the Fed’s previous statements that interest rates will remain low in order to continue to stimulate economic growth. Bernanke said once again that the Fed was likely to keep interest rates exceptionally low for "an extended period," a pledge that weighed on the dollar and pushed the prices of natural resource higher.

 

In a speech before the Economic Club of New York, Bernanke said the recovery would not be as robust as previously hoped and that rising unemployment and tight bank lending were significant headwinds. Even though Bernanke made a rare statement on foreign exchange markets, saying the Fed was watching the U.S. dollar closely, the dollar found very little reprieve.

 

The United States and China failed to reach an agreement over currencies at a summit of the Asia Pacific Economic Cooperation forum in Singapore. Bernanke, commenting on the dollar's decline, said the Fed is attentive to changes in the dollar, and the Fed's mandate will help ensure that the dollar remains strong.

 

Individual stock standouts included Exxon Mobil, up 2.7 percent to $74.43 amid higher crude oil prices, and Caterpillar, up 2.8 percent. Caterpillar, whose fortunes are closely tied to the commodities industries, as a major contributor of momentum to the Dow Jones industrial average. Other assistance came from Boeing, up 3.6 percent at $52.48.

 

Shares of AK Steel Holding rose 7.9 percent to $18.77, while Newmont Mining closed up 2.8 percent at $52.39. Meanwhile, COMEX December gold hit a record above $1,140 an ounce.

 

On the Nasdaq, Intel rose 2.2 percent to close at $20.25 after the company increased its quarterly dividend by more than 12.5 percent.

 

In the last hour of trading stocks briefly pared gains as Meredith Whitney, a prominent analyst, said in a CNBC television interview the stock market run-up was not supported by fundamentals.

The benchmark S&P 500 is now up 64 percent since the 12-year closing low of March 9.

 

Monday's economic data showed October retail sales increased by 1.4 percent last month but were much less impressive with auto sales stripped out. In addition, September figures were revised to show a larger drop overall than had been reported previously.

 

Fed Determined to Keep Rates Low Despite Falling Dollar

 

Fed Chairman Ben Bernanke, in a rare comment on the dollar's value, acknowledged the currency's slump was raising some prices, but said other factors restraining inflation were winning the day. While showing he was not indifferent to the dollar's slide, Bernanke pointed out that tight credit and a weak job market would weigh on the economy's recovery and he repeated the Fed's pledge to keep interest rates exceptionally low for "an extended period."

 

"We are attentive to implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability," he said.

 

According to Bernanke, the central bank's commitment to its dual objectives, along with the strength of the economy, would help ensure that the dollar was strong and a source of global financial stability.

 

The dollar initially rose on his comments, but fell back later in the day, hitting a 15-month low against a basket of six major currencies. Gold prices hit record highs and oil prices settled up more than 3.0 percent as the dollar weakened. Fed officials usually defer to the U.S. Treasury Secretary on issues relating to the dollar's value, although Bernanke has commented on the currency in the past.

 

After the global financial crisis saw investors repatriate funds in 2008 pushing up the dollar, the dollar has lost about 16 percent of its value since mid-March this year as risk appetite has returned. "These safe haven flows have abated, and the dollar has accordingly retraced its gains," Bernanke said.

 

The dollar's decline this year has sparked concern from Paris to Beijing. In Europe, policymakers worry that the strength of the euro is harming economic recovery prospects while the dollar's drop has eroded the value of the Chinese government's massive holdings of U.S. Treasury debt.

 

Chinese banking regulator Liu Mingkang said on Sunday that low U.S. interest rates and a weak dollar posed a "new systemic risk" because they were fueling speculation in overseas asset markets, a particularly pointed criticism with U.S. President Barack Obama visiting China.

 

However, Bernanke was careful to point out that "crosscurrents" in the inflation outlook and "significant changes" in economic conditions could change the outlook for policy as well, suggesting the Fed would act if the dollar begins to unravel in a disorderly way.

 

Dallas Federal Reserve Bank President Richard Fisher said that the currency's decline had been orderly, but that the central bank was aware its commitment to low rates could fuel speculative activity.

 

Bernanke noted that the currency's decline had helped push commodity prices higher. However, he also said a high level of slack in the economy and stable longer-run inflation expectations should keep price pressures under wraps.

 

"On net, notwithstanding significant crosscurrents, inflation seems likely to remain subdued for some time," he said. He said the Fed would closely monitor inflation expectations, which can offer an early warning signal of whether an inflationary psychology is building.

 

Most gauges of inflation expectations have stayed within the Fed's comfort zone, although the Reuters/University of Michigan survey of consumers on Friday showed five-year inflation expectations rose for a second month in November.

 

Bernanke said that while the economy appeared to be in the early stages of recovery, how it will fair once government stimulus measures dry up is uncertain. "My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely," he said.

 

Like Bernanke, Kansas City Federal Reserve Bank President Thomas Hoenig said in a speech in Abu Dhabi that the U.S. economy still faced significant weaknesses.

 

Retail Sales Rise Sharply

 

Retail sales grew more than expected last month as vehicle purchases bounced back, but non-auto sales rose modestly, suggesting consumers remained too cautious to drive a robust economic recovery. According to a Commerce Department report released on Monday, total retail sales increased 1.4 percent last month after dropping 2.3 percent in September. However, if you exclude autos, then retail sales rose just 0.2 percent following a 0.4 percent rise the prior month. Nonetheless, it was the first time in more than a year sales outside autos rose for a third straight month.

 

Retail sales in October were lifted by an increase in new vehicle and parts receipts, which surged 7.4 percent. Auto sales had slumped 14.3 percent the previous month following the expiration of the government's popular "cash-for-clunkers" incentive program in August that had buoyed demand for motor vehicles. Previously, the government had reported auto sales falling 10.4 percent in September. Even without the boost from auto sales, there were signs consumer spending continued to slowly improve in October.

 

Core retail sales excluding autos, gasoline and building materials rose 0.5 percent, advancing for a fourth straight month. Analysts said this was evidence of a gradual improvement in consumer spending.

 

Despite the strong headline retail sales reading last month, analysts were concerned with the sharp downward revision to September's figure, which was previously reported as a 1.5 percent drop. They said the revision indicated the government would have to adjust downwards its third quarter growth estimates.

 

The economy expanded at a 3.5 percent pace in the July-September period, after four straight quarters of decline, driven mostly by government stimulus. The government publishes its second GDP estimate next week. There are worries that as government stimulus fades, rising unemployment will continue to weigh on consumer spending and hold back the recovery.

 

Gold Hits Record High

 

Gold managed to reach a record high above $1,140 an ounce on Monday, gaining 2 percent as a weakened dollar boosted funds' risk appetite for investments across the board. Gains in gold spurred interest in other precious metals, with platinum, palladium, silver and rhodium all hitting their strongest levels in more than a year, largely driven by a tumbling dollar.

 

Year to date, gold has risen 30 percent, outperforming the broad-based equities S&P 500 index, which has gained 23 percent over the same period. Gold's ascent was driven by a combination of dollar weakness, inflation worries and concerns over the nascent economic recovery.

 

 December gold futures settled up $22.50, or 2 percent, at $1,139.20 an ounce on the COMEX division of NYMEX.

 

Gold now looks poised for further gains, with a number of call options, or rights to buy, being placed at elevated levels on U.S. December gold futures.

 

Gold's gains lifted other precious metals, with silver reaching its highest since July last year at $18.43. Platinum hit $1,451.50 an ounce, its highest since September 2008 and palladium reached its strongest level in 15 months at $375.50. Later, platinum was at $1,444.50 an ounce against $1,390, while palladium was at $374 against $353.50. Rhodium hit a 13-month high at $2,375. Silver was at $18.41 an ounce against $17.41.