FYI | Aug 17 2007
By Greg Peel
Some of the numbers across the boards in the last 24 hours have been quite astonishing. Yesterday Asian stock markets took the big hit. The Korean Kopsi, for example, was down 7%. Then the panic continued into Europe. The UK FTSE, for example, was down 4%.
The Australian market was down 5.3%, probably exacerbated by the trading halt on the SFE, but at its nadir the index found its 50% retracement point from the previous rally off the March low. (See “Rudi On Thursday Extra”). There began the sharp recovery rally, as bottom-pickers fought with short-coverers in a scramble for stocks.
The news out of Wall Street in the morning was not good. The Fed injected another US$7 billion (followed up with a further US$5 billion later in the day) but hopes were scuppered when St Louis Fed President Bill Poole stated that he did not see any reason to lower rates unless a real “calamity” transpired. While some were wondering if Mr Poole could please provide his own definition of “calamity”, and how it differed from the current market, the door was left open for a rate cut when the FOMC meets on September 18.
Then came the economic data. The Philadelphia Fed announced its economic index (considered a bellwether for all of the US) had dropped from 9.2 in July to zero in August. This implies the economy has reached a point of not contracting, but not growing. The Commerce Department announced the construction of new homes had fallen to the lowest level in a decade in July.
Then the biggest US private mortgage lender – Countrywide – announced it had gone cap in hand to a total of 40 banks in order to raise US$11.5 billion to stay afloat. Its shares dropped another 11%.
At 1pm, the Dow was down 344 points. Then the battle began. By that point, the financial sector had finally been sold down to the level of July 2006 – the point at which the last steep bull run began following the commodity correction. The Dow had also found its 10%. This it would seem, was the nadir required, just as Australia had backed the 50% retracement from March. The Dow bounced hard, driven, again, by bottom-pickers and short-coverers. It has to be remembered, incidentally, that short-sellers have margin calls too. Within an hour the Dow had pulled back to about 100 down but in the next hour tried to give most of that back. The buyers regrouped however, and the final hour provided an extraordinary 300 point rally.
The Dow closed down 15 points, or 0.1%. The Nasdaq closed down 0.3%, but the S&P 500 actually closed up 0.3%. It has been many days since Wall Street closed on an upswing.
While the late rally was a heartening sign on the stock markets, elsewhere there was plenty of carnage. Last night was the night for commodities to finally snap. Leading off the rout was oil, which fell 3% to US$71/bbl. This was, however, sparked by the good news that the two tropical storms threatening the Gulf had been downgraded. But there was little good news anywhere else.
On the London Metals Exchange, aluminium fell 2%, copper 7%, lead 5%, nickel 5%, tin 1%, and zinc 8%. Gold returned to being a commodity rather than a currency, and fell US$16.50 to US$652.40/oz.
Liquidated positions (that weren’t required to cover margins) fled into US Treasuries. The 90-day T-bill fell in yield as low as 3.3% before recovering to 4% once more on the stock rally. The ten-year bond yield fell 11 basis points to 4.6%. While the US dollar was favoured against the euro and pound, the yen shot to a thirteen-month high. The Aussie dollar was routed in the carry trade unwinding, falling as low as US$0.7850 before returning to US$0.7913.
The late turnaround on Wall Street should, by rights, see some strength in the Australian market today. Commodity price falls were savage, but the miners have already been hit. The SPI Overnight was not, however, exuding confidence. It closed up 10 points. But then it all happened on Wall Street right on the death.
A sharp rally after such an accelerated correction would be text book. The next trick is to decide whether it is simply a correction correction.
