FYI | Sep 11 2007
By Greg Peel
Yesterday Japan announced a 1.2% fall in second quarter GDP from the second quarter last year, against previous expectation of a 0.5% rise. The world’s second largest economy has now posted one down quarter – two and it’s in recession. It’s hard to see the July-September quarter being any but negative. All the focus is currently on the US economy, the world’s largest by a long mark. But the second largest economy still dwarfs that of China. Like the US, Japan is a major importer of Chinese manufactured goods.
It is now unlikely the BoJ will raise interest rates in Japan. There was already uncertainty surrounding what was seen to potentially be nothing more than a carry trade busting move anyway, and now Tokyo has no excuse. The effect of the GDP release was a bounce back in the US dollar against the yen, just as the dollar was looking over the edge of the abyss. The yen turnaround helped to halt the slide in Australian equities yesterday (although bulk mineral giants felt the pinch), and to head off more weakness in the Aussie dollar. Early yen strength had the Aussie testing US$0.8200 once more, but the market rebounded back towards US$0.8260.
Gold also continued to march tenuously north in the Asian time zone, and at the close of New York simply held its ground at US$702.40/oz. Gold has run hard these past few days as its safe haven status returns to the fore. It may yet have to do some work around US$700/oz and may come in from some profit taking. There is little doubt speculation of the Fed cutting rates by up to 50 basis points or more on September 18 is having a positive effect on the gold price, so gold bulls may want to beware if the Fed settles on 25 basis points or – heaven forbid – leaves rates unchanged. Under the latter scenario the equity market would tumble. It may even do so under the former.
So what will the Fed do? Well that’s the US$64 million question, and last night provided not much more than confusion for Wall Street.
AP reports speeches from Fed officials Monday seemed to give investors a bit more reason to be optimistic about the economy, but the officials avoided hinting at how the central bank might alter rates. San Francisco Fed President Janet Yellen said that while market turmoil has the potential to hurt the economy, rate policy should not be used to shield investors from losses. Dallas Fed President Richard Fisher said the economy appears to be “weathering the storm,” and Atlanta Fed President Dennis Lockhart said investors should consider Friday’s unemployment report in the context of a mostly strong batch of retail sales reports.
The Dow fell 92 points in early trade, with weakness in the financials once again apparent. This was despite news that British billionaire Joseph Lewis had acquired a 7% stake in troubled investment bank Bear Stearns. But with little new news in the afternoon, short covering in financials helped to turn the Dow around to be up 94 points on the day, before the now ubiquitous late square-off provided a close of only up 14 points, or 0.1%. The S&P lost 0.1% and the Nasdaq fell 0.3%.
Wall Street really doesn’t know where it’s at.
The bond market is more certain, as the ten-year bond yield closed down from 4.37% to 4.32%. Money is still flowing into the “risk-free” benchmark as stocks are liquidated, rendering equity valuations inexpensive. Interest markets are toying with just how much the Fed cut will be as well.
Base metals markets closed weaker in London in ongoing global economy concern as the Dow was reaching its nadir. Nickel and zinc were both down around 4% and copper 1.5% but while nickel and copper rebounded somewhat in the later New York session as the Dow rallied, zinc failed to do so.
Tuesday sees a meeting of OPEC leaders (not to be confused with APEC) and speculation that Saudi Arabia would push for production increases sent oil as much as US$1 lower in early trade. Then followed news of explosions in Mexican natural gas pipelines – probably perpetrated by left-wing radicals – and another tropical depression building in the Atlantic. Oil quickly reversed to close US79c higher at US$77.79/bbl – getting very close to all time highs.
The SPI Overnight fell 19 points.
