FYI | Aug 22 2007
By Greg Peel
It was still an up and down affair, featuring a low of 69 points down, a high of 57 points up, and a close of 30 points down in the Dow. But in context of the last couple of weeks, this was a quiet day. The VIX volatility index has now edged down for three days consecutively. Volume on the NYSE fell from 3.3 billion shares on Monday to 2.95 billion on Tuesday, contrasting with the 5 billion plus shares changing hands on Friday.
While the Dow marked a 0.2% fall at the close, the S&P 500 rose 0.1% and the Nasdaq added a spirited 0.5%. The Nasdaq is benefiting from ongoing strength in the tech sector which is being seen as a good place to be – far away from the financially-driven chaos of other sectors.
The fall in the 30-stock Dow was in part attributable to the fall in the oil price. Nymex crude for September delivery fell US$1.65 to US$69.47/bbl. This may seem strange given Hurricane Dean was overnight upgraded from a Category 4 to the highest level Category 5, but it’s okay because the announcement came through that US interests in the Gulf would be spared. Praise the Lord. Only Mexican interests will be shattered and a few vacationing college students at Cancun blown away. Dow component Exxon copped the brunt of the selling.
Before the opening bell US Treasury Secretary Hank Paulson was interviewed by CNBC and played pure politician. Think of Peter Costello in the role. Traders were supposedly heartened by his soothing words of a strong economy but then what was he going to say anyway? If anything, Paulson managed to achieve classic polly self-contradiction by lauding the US economy one minute and suggesting weakness may yet prevail as the problems work through the system the next.
And the political bias continued as Christopher Dodd, chairman of the Senate Banking Committee and outside Democrat presidential candidate, emerged from his meeting with Paulson and Fed chairman Bernanke. Much was made of this meeting, despite Dodd pointing out that under any normal circumstances the chairman of the Senate Banking Committee always meets with the Treasury and the Fed. Dodd emerged suggesting the cash rate would indeed be cut, as supposedly Bernanke was not yet happy with the market’s response to Fed measures to date. This provided another boost for traders, but Polly’s wings were soon clipped when Richmond Fed President Jeffrey Lacker said later the central bank’s policy must be guided by fundamentals, rather than market swings, indicating that a cut in the fed funds rate might not be among the tools the Fed plans to use.
It is the issue of a Fed rate cut that has brought us into the land of Limbo. Many in the market believe the Fed will cut rates (and the rush into short US Treasuries confirms this belief) while others believe it won’t. Many believe the Fed should cut rates while many believe it shouldn’t. The irony is that if the Fed does cut rates this would be bullish, but it would only occur under further bearish circumstances. But then, perhaps more bearish circumstances are exactly what this market needs.
For we are also in a state of Limbo due to ongoing anxiety that one day soon a big brokerage or hedge fund is going to come out and declare its real losses. This would set the market off into panic once more. If only everyone would mark to market, declare their hands and take the hit together, then maybe we really could return to the normal programming of an otherwise buoyant global economy.
(Last night an unidentified party went to the discount window of the Bank of England and borrowed 314 million pounds at 6.75% – 100bps above the 5.75% cash rate. The BoE has been conspicuous in its absence to date, not injecting any extraordinary liquidity when every other central bank was and not, clearly, lowering its discount rate as the Fed has done.)
(On the other side of the coin, a rumour ran around that Warren Buffet was interested in Countrywide. The beleagured lender’s shares jumped 10%. Buffet laughed it off.)
And on the subject of the buoyant global economy, China raised rates once more yesterday in a move that surprised no one. The Chinese government is concerned over recent ominous inflation data and the unstoppable stock market. But in what was a bit of a surprise, the PBoC raised the deposit rate by the standard 27bps but only raised the lending rate by 18bps. Huh? The move was really effective, as the Shanghai Composite shot up another 1% to breach all-time highs once more. During the whole global credit crisis, the Shanghai Composite has not blinked.
The rest of the markets also continued in relatively quiet mode. The US ten-year bond yield eased another 4bps to 4.59%. The US dollar was mixed, but still rather weak against the yen. A bit more carry trade activity saw the Aussie slip back a good half a cent again to be sitting on about US$0.80. Base metals were steadyish, although nickel jumped while zinc fell. Gold slipped a quiet US$1.90 to US$655.90.
Activity in the gold market was indeed interesting, however. It appears the metal is attracting more safe haven interest as each day of the credit crisis plays out. StreetTRACKS gold shares – the biggest ETF – recorded a volume of 507 tonnes held on Friday and a record volume of 514.21 tonnes on Monday.
The biggest news in the commodities markets yesterday was, however, another fall in the reported spot price of uranium. Ux Consulting declared a trading price for last week of US$90/lb – a US$15 fall from the previous week. The current excess of supply over demand in the uranium spot market has now seen the price fall 35% from its high.
The SPI Overnight was down 29 points.
