By Greg Peel
The Dow fell 101 points, or 0.8%, while the S&P lost 1.0% to 1441 and the Nasdaq dropped 1.4%.
After spending many sessions hanging around at the top doing nothing, last night Wall Street succumbed on a "something had to give" basis despite the safety net of unlimited QE. We must remember that this time QE was fully anticipated, unlike 2010-11 in which QE rescued Wall Street from its September quarter depths.
It was a positive start to the US session on the morning's data releases. The Conference Board's consumer confidence measure showed a rise to 70.3 this month from 61.3 in August to its highest level since February. Both the Case-Shiller 20-city and the FHFA (Fannie/Freddie mortgage) house price index showed gains for July, indicating the slow grind of improvement in the US housing market is ongoing. But that's where the goodwill ended.
Leading global machinery supplier and Dow component Caterpillar came out to announce a profit warning ahead of next month's September quarter earnings season, citing a slow global economy. Cat is a major supplier of Tonka toys to the mining sector and has felt the same impact of lower commodity prices as is the case in Australia. The company had become too optimistic with is inventory build-up, and now must start to clear stock.
Next came Philadelphia Fed president and outspoken QE critic Charles Plosser, who suggested QE3 will not create jobs and will prove ineffective. Plosser, who is not an FOMC voting member, labelled the policy unnecessary, unhelpful and risky.
Up to now, Wall Street has been unable to post any meaningful down-days even on earlier profit warnings (FedEx in particular) as the "don't fight the Fed" buyers always emerge towards session-end. Perhaps Plosser's words were echoing when traders turned their attention to TV screens showing angry protests outside of the Spanish parliament building in Madrid. Spaniards were letting their government know what they thought about the harsher upcoming budget.
The US earnings season is now looming large and the mood is becoming more downbeat as the profit warnings roll in. The only hope is that analysts have marked their forecasts down far enough as to once again provide some mild upside surprise on the final results. Meanwhile in China, Beijing has pumped additional liquidity into the banking system to counter a perceived liquidity squeeze heading into next week's week-long holiday break. The Chinese have also rushed to build up base metals inventories, as reflected in last night's against-the-trend rise in LME prices. Movements ranged from copper up 1% to tin up 3%.
London traders shrugged off the moves as a blip nevertheless. The US dollar index fell initially on the solid economic data, but ended the session up 0.2% to 79.67. Gold slipped slightly again to US$1760.70/oz and the Aussie was 0.4% lower at US$1.0391. Oil also showed a mixed response, with Brent up US64c to US$110.45/bbl and West Texas down US99c to US$90.94. Spot iron ore in China is unchanged at US$103.70/t.
The SPI Overnight was down 35 points, or 0.8%.
The Fed will release its Beige Book ? an anecdotal assessment of the state of the US economy ? tonight, albeit QE3 rather overrides any conclusions. Ditto the final revision of the US June quarter GDP tonight, which is very much ancient history. New home sales will round off the release calendar.
With Spain already starting to riot without yet learning the specifics of the budget, things may come to a crunch by tomorrow morning after the budget is released. Mind you the Greeks had a red hot go and it didn't seem to get them anywhere. Perhaps more concerning for Madrid is the building push for greater autonomy in Spain's largest state on a GDP contribution basis ? Catalonia.
It could be chorizos at dawn.