FYI | Jul 27 2007
By Greg Peel
This is almost pretty: +21, -53, +82, -149, +92, -227, +68, -311
Not so pretty was the blood on the floor of the New York Stock Exchange last night as the Dow went nowhere but down for all but the last hour of trade, managing to turn a 450 point loss into a close of down 311, or 2.2% – still the biggest fall since the Shanghai Surprise in February. The S&P 500 was down 2.3% and the Nasdaq 1.8%.
If Wall Street needed any impetus for such a move it came in the form of housing data, but the writing had already been on the wall. The Dow futures were down over 100 points before opening and European markets were already in a tailspin as US traders grabbed their first Starbucks of the day. Australia had also pre-empted danger with its soft performance yesterday. As Europe closed with the Dow near its lows, the FTSE had lost 3% and the DAX over 2%.
US new home sales for June were down 6.6% against market expectation of a 1.6% fall. This is the worst result since sales fell 12.7% in January, and confirms the “second wave” theory of the US housing slump. Adding to the misery were durable goods and capex spending figures that, while positive, were less positive than hoped. The culmination of these results is not only a fear of more mortgage carnage ahead, but also of a collapse in consumer spending.
It was a day for building companies to post their quarterly reports, and they did not surprise.
Adding to the drama was yet another leap in the crude oil price early in the session, as once again concerns were raised over the extent of US supplies. Nymex crude for September delivery rose another US$1.27 hit a high of US$77.15/bbl, only US$1.25 below the all time high of US$78.40/bbl achieved this time last year. The combination of soaring oil and slumping housing is enough to engender fears of a US recession.
But then if there is a US recession, or at least a pullback, that’s not good for oil. As the Dow fell the profit-takers moved in and oil reversed sharply to close down nearly a dollar on the day to US$74.95/bbl. This would have assisted the Dow to rally late, but then, once again, who is leading whom here?
The acceleration of credit market concerns – the focus of which has now moved out of mortgages and into corporate debt, particularly buyout bonds – sparked a genuine flight to quality as investors shucked equities and ran for US Treasuries. Ten-year bonds were heavily sought after, sending yields sharply down from 4.9% to 4.8%. While sovereign debt became the safe haven focus, the other safe haven – gold – suffered its now familiar liquidation as investors scrambled to cash up and pay margins calls on their collapsing stock holdings. This is a twenty-first century phenomenon in the gold market, where the extent of leverage in other commodity holdings means that gold must first be sold for cash before it can find its level as the other obvious safe haven in a time of crisis.
Gold fell US$12.80 to US$662.10/oz – a fall which would have also been exacerbated by a step up in carry trade unwinding. Gold ETFs have been another source of carry trade money. For gold fell despite a fall in the US dollar against major currencies.
And its biggest fall was against the yen. The US dollar fell 1.7% to 118.28 against the yen and while the dollar fell against the euro, the euro also fell against the yen. This implies carry traders are now buying back their yen loans and liquidating those assets on the other side of the carry trade that were providing the income. This, of course, includes the Aussie which suffered its first major shakeout in a long while falling from above US$0.88 to US$0.87.13. The Kiwi was similarly dispatched.
Earnings? Who cares about earnings? There is a vacuum in the credit market that is all about the reassessment of risk, and there is little doubt, as volatility indices spike, that the credit market will need to J-curve its way into any stability. No one is buying debt. Half the market is paralysed with fear and the other half is not interested in stepping in until the dust can settle. And it may take some time yet. Wall Street is now seriously concerned that the major banks are going to be stuck with billions in buyout junk bonds they cannot shift. Pending issues of corporate paper are being pulled left right and centre. Private equity stalwart KKR is now rumoured to be reconsidering its IPO. Blackstone shares have tanked.
There were good earnings reports out last night. And Apple maintained its remarkable run, adding another 6% in the face of the avalanche. Nevertheless, the bears point to sales of the world-changing iPhone, which still appear to be below expectations. Consumers not prepared to part with the money?
But perhaps the biggest earnings shock on The Street was bearish this time, with Exxon posting a disappointing profit. Production, it appears, is waning, which has proven more influential than any oil price rise.
Base metal prices were never going to have a good night in the face of all of this, although falls were not extreme (except lead, which continues to give up gains and was down 3%).
None of this is going to be good news for the local bourse, already wobbling from expectations of an interest rate hike. Following an 82 point down day in the physical, the SPI Overnight fell 152 points.
Is there any good news? Maybe Cadel Evans can do a Bradbury and get up to win the Tour de Pharmacie.
