In case you missed it, Alcoa was the first Dow Jones company to report and the summary was — less worse than expected and the outlook was relatively positive.
Our All Ords rose 31 per cent at its best and we now have retraced around seven per cent and a few weeks ago I was suggesting that a 10 to 15 per cent pullback was on the cards. The reason for that was the fact that the 31 per cent jump in the market was a big one.
Sam Stovall from Standard & Poor's told CNBC that this is the correction many expected.
"We're going through a corrective phase now," said Stovall. "A digestion of the 40 per cent advance off of the 9 March lows."
Yep, the Yanks went up 40 per cent, so you didn’t have to be a market guru to tip a pullback. The tricky bit is to work out how low we will go. I am in the “we won't go below the March lows” camp. What could prove me wrong? A shocking three or so weeks of bad US company profits reports that spook Wall Street forcing global stock market down into the cellar!
The flipside would be that better than expected results would take us to the penthouse over coming months. Options traders in the US say call options are on the rise and that suggests they are betting that earnings will be good. Let’s hope they are right.
Stovall thinks the S&P 500 could drop to 800 to 825. This view is supported by chartists who say that a head and shoulder formation on the charts points to a drop to these levels in the short term.
One reason for a sell off this week was talk of a second stimulus package in the US, which made investors fear that the US economy was faltering on its transition to the expected second-half recovery.
Of Barack Obama’s plan to spend $787 billion in his stimulus package to save 4 million jobs, which was passed in February, only 10 per cent has been spent! The US does not need a second package it needs to spend the money already earmarked in the stimulus package.
Isn’t it ironic that the Rudd Government was criticised for handing out cheques but our economy has responded to its fiscal stimulus as seen in retail sales and consumer confidence? Of course, they were helped by the interest rate cuts from the Reserve Bank but combined the simple summary is our economic policy is working while the US Government is really struggling.
Don Stammer, the former chief economist at Deutsche Bank, who appeared on my show on Sky News Business Channel this week, says we have one of the best interest rate policies in the world because most of us have variable interest home loans. This means when the Reserve Bank raises rates, they hurt, and when they cut, it really helps. In the US, most people are on fixed rates and for 30 years or so the interest rate policy is less impactful.
In June, US employers cut around 467,000 jobs, sending the unemployment to 9.5 per cent, which is the highest in 26 years. A 10 per cent number looks likely.
But there is some good news. The number of workers filing initial claims for jobless benefits fell last week to the lowest level since January.
New claims dropped by 52,000 to 565,000, and was way below expectations of 605,000. This could help the case that a second-half recovery is on the way but there were some technical factors that could have affected the figures, making them less reliable for the month.
However the four-week average of initial claims fell to 606,000, which is 50,000 lower than the worst reading April. Future readings of this statistic will be closely watched.
But the big watch, as I have already said, will be US company profits and the outlook statements. If they surprise on the optimistic side, the markets and our wealth will be heading in the right direction. And it all starts in earnest next week.
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