Daily Market Reports | Apr 30 2008
By Greg Peel
The Dow fell 39 points or 0.3%, while the S&P fell 0.4% and the Nasdaq was as good as unchanged.
It was a very quiet day as expected ahead of tonight’s rate decision from the Fed. But for that uncertainty, one wonders what might have been. On the economic data front, the news was far from inspiring.
Consumer confidence in April fell for the fourth straight month to a level of 62.3 – a five-year low. March’s number was 65.9 and February’s 76.4. The index is moving closer to the previous low of 61.4 in March 2003, just ahead of the invasion of Iraq. This was not as bad as expected however, given consensus had an April reading of 61.0.
More ominous than consumer confidence were the latest housing data. The Case/Shiller home price index showed a decline in house prices in the top 20 US cities of 13% year-on-year. This is the sixth straight month of declines and the pace is accelerating. RealtyTrac reported the number of homes in foreclosure increased 23% in the first quarter from the fourth quarter 07, and 112% from the first quarter 07.
The housing market is finding it difficult to find buyers now that mortgage lending practices have been considerably tightened post-subprime. And along with the increased deposits required and the more assiduous job security checks is the problem that mortgage rates have not come down. They leapt when the credit crunch hit and have remained elevated despite the Fed’s aggressive cutting program. The liquidity is out there, but it’s not getting through to mortgage lenders. The same lack of relief in mortgage prices is also hitting existing mortgage holders and forcing the rise in foreclosures. Thirty-year fixed mortgage rates are still above 6% while cash is at 2.25%.
For those with adjustable rate mortgages there has been some relief. The adjusted rates are contingent on Libor which has maintained a wide credit spread over cash. While the wide credit spread indicates virtually no relief for bank cost of funds, the lower cash rate means a lower nominal Libor benchmark. But if your mortgage rate is jumping up to over 10%, it probably doesn’t matter a lot.
On the earnings front, good results were posted by Office Depot and Mastercard. While one might expect a credit card company to suffer in these conditions it must be recognised that it is the sheer weight of global transaction processing that drives Mastercard and its rival and public newcomer Visa. Unsurprisingly, BP and Shell also posted strong results, while drug pusher Merck was knocked back on an important cholesterol drug and paid the price.
There was very little action in stock markets, however. There was more action elsewhere.
Traders had anticipated that the refinery strike in Scotland might halt significant North Sea oil supply for some time, both in terms of resolution time and the time it takes to restart a refinery. However, the dispute has been resolved and the oil will be flowing again in a matter of days. Add in further strength in the US dollar overnight, and oil fell US$3.12 to US$115.63/bbl.
The US dollar strength, which no doubt is as much about the shorts pulling out ahead of the Fed decision as anything else, was assisted by the consumer confidence measure not being as bad as expected. The euro has now pulled back to US$1.5568 having traded over US$1.60 at its peak. Expectation is growing that the Fed will cut by 25bps and then announce, or at least hint at, a holding pattern.
This building expectation, the strengthening dollar, and the oil price fall were not going to help gold last night which broke the support of the last couple of days and fell US$21.00 to US$871.60/oz. The Aussie also fell, giving back half a cent to US$0.9338.
Base metals also moved to the downside, but the state of limbo remains and volumes were low. Falls of 1.5-2.5% were registered across the spectrum.
The SPI Overnight didn’t like it much – it fell 50 points.
Immediately after the close in New York, Citigroup announced an issue of $3bn in common stock in yet another attempt to shore up its capital base. The US$3bn adds to US$6bn issued to date in preferred stock and the US$32bn raised through sales of stock to sovereign wealth funds and the sale of other assets. Citi’s shares traded down 1.8% in the day-session last night, and fell a further 3% in the aftermarket on the announcement.
