Small-caps push higher on dollar rally, crude slide

Kevin Pendley | Aug 08, 2008 10:17am EDT | Comment

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Small-cap stocks pushed higher in early trading, buoyed by a sharp rally in the U.S. dollar and a pullback in crude oil prices, which helped offset renews jitters about financial stocks after Thursday’s rout. At 10:02 a.m. ET, the Russell 2000 (NYSE:IWM) was up 7.46, or 1.05% at 720.87.

The market is on notice once again about the credit crunch after American International Group (NYSE:AIG) reported huge debt write downs Thursday. Financial shares were starting out on a weak note today as well, pulled down by sloppy results from Fannie Mae (NYSE:FNM) as the government-sponsored mortgage lender missed the forecast and slashed dividends. FNM shares were off 15% shortly after the open and its sister company Freddie Mac (NYSE:FRE) was down 5%. Financial stocks were pounded Thursday and could be on the defensive again ahead of the weekend. Bank of America Corp. (NYSE:BAC) was down 1.5% after an analyst downgrade.

The big story today is a dramatic rally in the U.S. dollar overnight, which exploded 1.5%, or more than 230 basis points against the euro. And although the extreme move versus the euro will capture the most attention, the greenback was busy flexing its muscles all over the world. For instance, the dollar made 17-month highs against the British pound, 11-month highs against the New Zealand kiwi, 12-month highs against the Canadian looney and 5-month highs against the Swiss franc.

In general, a strong U.S. dollar implies relative economic strength and attracts flow into U.S. assets, but there is some concern that this sudden surge in the dollar is more about weakness in other regions than a revival in the U.S. picture. The trigger point for those concerns were relatively dovish comments from European Central Bank president Jean-Claude Trichet following the ECB policy meeting Thursday.

Stock markets around the world were mixed overnight, but the biggest moves were to the downside in China and in Russia. The 4.7% drop in China stocks on the eve of the Olympic opening ceremony was something of a surprise, spurred by disappointment that the government did not announce plans to bolster stocks in conjunction with the Olympic kickoff. Meanwhile, Russian shares were down nearly 4% and the currency tumbled 0.7% on news that military forces from Russia and Georgia were sparring. Elsewhere on the planet, Singapore shares were off 0.9%, Kuala Lumpur down 0.8%, Hong Kong down 0.9%, Taiwan up 2.6%, Japan up 0.3%, Australia flat and Vietnam up 1.2%.

Crude oil prices were down into the U.S. stock market open, which could provide some underlying support to equities. Crude oil was down more than $3 dollars a barrel, below $117, pulled down by the strong U.S. dollar and by talk that the damaged pipeline in Turkey could be up and running again sooner than feared. It’s worth noting that the strong dollar could be a bearish influence on a broad host of physical markets today; gold was down 1% ahead of the open, cotton down 2.4%, cocoa down 2.6%, copper slipped to 6-month lows and grains futures were expected to trade solidly lower today. While commodity-based stocks could be hurt by this trend, the overall help it provides on the inflation front tends to be seen as equity supportive.

Broad market sectors on the rise this morning included home improvement retail shares, wireless telecoms, general merchandise stores, airlines, casinos, department stores and air freight couriers. On the downside, coal, steel, gold, aluminum, mining and oil drillers were getting drilled with the rise in the dollar and the pullback in raw commodity prices.

Individual small-caps of note included Eddie Bauer Holdings Inc. (Nasdaq:EBHI), which was up 20% on solid earnings news. PowerSecure International Inc. (Nasdaq:POWR) was up 15%, also powered by earnings results. World Fuel Services Corp. (NYSE:INT) jumped 6% following positive quarterly figures. On the downside, ANADIGICS Inc. (Nasdaq:ANAD) tumbled 36%, gapping down as the firm lowered guidance.

The productivity report came and went this morning with very little fanfare. The headline number came in at 2.2%, which was below the forecast of 2.5%. According to Steven Wood, chief economist with Insight Economics, moderate productivity gains and soft unit labor costs are the result of sharper reductions in the workforce than in output. “This will help contain inflationary pressures and make it easier for the FOMC to keep rates on hold through the next several policy meetings,” Wood said in an email. If you think the productivity report was pretty much a non-factor this morning for stocks, then the wholesale inventory data was really a yawner. If you’re keeping track, inventories were up 1.1%, well above the forecast of 0.6%.