Daily Market Reports | Mar 14 2008
By Greg Peel
The Dow closed up 35 points, or 0.3% last night, while the S&P rose 0.5% and the Nasdaq 0.9%. A seemingly benign Dow finish belied the fact the index was down 235 points at 11am and up 105 points at 2.30pm.
Early weakness on Wall Street was largely due to three factors. Firstly, Asian stock markets posted big losses yesterday, driven by a 3% fall in Japan. Shanghai fell 2.5% and Hong Kong close to 5% on expected interest rate hikes in China. Australia chimed in with 2.3%, all but wiping out the previous day’s gains. Spooking the Japanese market was a fall in the US dollar to touch on 100 yen, a psychological barrier that hasn’t been seen for seventeen years.
The fall of the dollar against the yen pointed to ongoing global financial market concerns, but also to the fact the Japanese financial year ends this month. Offshore profits are repatriated, forcing yen buying. Stocks in large global exporters like Toyota and Canon took a dive on the fear a breach of 100 yen will evoke acceleration in the dollar’s slide, pushing the price of Japanese exports ever higher.
All things being equal, a rising yen should affect a falling Aussie dollar as carry trades are unwound. However, the Aussie has been more heavily influenced this last week by a general slide of the US dollar index on rate cut expectations, doubled up with more evidence the Australian economy is strong. The Aussie has jumped more than another US cent again in 24 hours, to US$0.9457. Australian economists are waking up each night in a cold sweat. One minute inflation is soaring and the RBA is expected to keep raising. The next minute the RBA hints at rate hikes having ended. Then come weak consumer confidence numbers which suggest the RBA may begin cutting by year end. But then yesterday’s new low unemployment record prompted a return to rate hike expectations. There are a lot more grey hairs.
The second driver of early weakness on Wall Street, which was revealed late in the Asian sessions, was that a hedge fund belonging to renowned global private equity firm Carlyle Group had failed to meet margins on its portfolio of mortgage-backed securities, and now expected the lenders to move in and seize control. While earlier in the week the Fed opened up the door to allow such lenders to swap distressed securities for Treasuries, it is announcements like this that only scare buyers further away from the mortgage security market.
Then ahead of the opening bell on Wall Street, the February retail sales figure was revealed as a fall of 0.6% against expectations of a 0.2% rise. It was also revealed that 60% more US households faced mortgage disclosure than in February 2007. A Wall Street Journal survey of economists found 71% believed the US economy was in recession.
Nor did it help that Treasury secretary Henry Paulson made a statement urging banks to reconsider their dividend payouts and preserve capital. He then outlined measures to toughen up regulations on mortgage lending, but that horse had bolted long ago. The Bush Administration rejected calls to more closely regulate subprime lending back in 2006.
It was all another cocktail of disaster that conspired to send the Dow back to its January closing low. But then the cavalry arrived.
Ratings agency Standard & Poors came out around 11am and upgraded their expectation of total subprime-related losses (that’s subprime only, not prime or other parts of the credit market) to US$285bn from US$265bn. However, they thus declared the write-downs to have reached over half way so far, meaning there is light at the end of the tunnel. This was taken as either great news, or a reason to quickly reverse shorts. The Dow shot up 100 points in a heart beat, then tried to stabilise into lunch.
After lunch the market learned that a Fed auction of US ten-year bonds “had not gone well”. The implication here is that the “flight to quality” is also reaching its peak. Bonds were immediately sold, giving further impetus to stocks. The Dow soared again to be up over 100. Support was provided by a proposal from the Democrat-led federal House Action committee to guarantee the mortgages of homeowners if…and it’s a big if…banks took the Fed’s advice and wrote-down the principal on mortgages that would then assure payments would be made – not for subprime pretenders, but for otherwise solvent households caught up in the credit squeeze.
The Fed and the government are now trying to throw absolutely everything at this market, in the hope the slide can be stalled. There is still an expectation of at least another 50 point rate cut next Tuesday. But not all of it is direct action – there’s still a lot of “urging” and “supporting” of the capital market beast.
The Dow lost its momentum by the last half hour, drifting back to its +35 close.
Now to those debut numbers. Oil traded over US$111/bbl last night and spot gold touched the magical US$1000/oz, as the US dollar slid to new index lows and looked like breaking 100 yen. The midday turnaround in stocks then crimped the momentum, with oil falling back to be up US41c to US$110.33/bbl and gold falling back to be up US$13.30 to US$995.20/oz. In gold’s case, there is understandable expectation of profit-taking at the magic number. In oil’s case, traders believe that global demand has only seen a slight wavering, and that fund buying will continue to drive prices higher.
Base metals did not share in the spoils, with the exception of tin. Tin closed over US$20,000/t for the first time, but the rest of the complex was caught between surging oil and gold and general US recession concerns. Prices were mixed.
The SPI Overnight closed up 50 points.
Tonight in the US sees the release of the February CPI, which will prove an interesting number for rate cut expectations and the US dollar. But the EU will release its CPI first, and a strong number in Europe will only reinforce the possibility the ECB will raise rates while the Fed is still looking to cut.
