Daily Market Reports | Aug 27 2008
By Greg Peel
The Dow closed up 26 points or 0.2% while the S&P managed 0.4% and the Nasdaq fell 0.4%.
Light-volume trading in a minimal range last night reflected the true state of the Wall Street mood at present – one of holiday thinness combined with a distinct lack of directional commitment any way. No one is particularly confident the market is headed either up or down in the short term, and traders suggest that even after next Monday’s Labor Day holiday – the weekend that signals the end of the summer vacation – Wall Street is unlikely to see any great return to solid trading volumes. Movements such as the up-200-down-200 of the previous two sessions are just thin-market furphies.
A representation of equivocal sentiment came in the form of the Fed minutes last night, released following the August 5 rate meeting. There was no change to the view most recently expressed – that the US economy is continuing to weaken and while inflation remains a clear and present danger it should nevertheless be constrained by said economic weakness. In other words, no change to the 2% rate and not much chance of any change in the short term.
The US dollar shot out of the blocks last night, however, but in the form of a weaker euro. A German business sentiment index dropped more sharply than even the pessimists had predicted, reinforcing the view of German economic contraction and the possibility of an ECB rate cut. The euro fell to its lowest level since February, but bounced slightly when the US received some news of its own.
The Case-Shiller house price index fell to -15.9% in June from -15.8% in May on a year-on-year basis. The good news is the rate of the house price fall appears to be slowing, but the bad news is it is still falling. The index averages median house prices in the 20 biggest US cities, and not one city showed a rise. Some remain down 20%. At the same time, the 30-year mortgage rate is creeping steadily higher as lending standards tighten and credit remains scarce. With 11 months of unsold inventory and a mortgage rate going the wrong way, there is no end in sight at present to the housing slump.
This news tempered the US dollar’s rally last night, but there was still enough to lop another three quarters of a cent off the Aussie, which now sits at US$0.8559. The oil price initially fell back to the US$115.00 mark on the higher dollar, but then the weather reports came in.
Tropical Strom Gustav is emerging as the first legitimate threat of the season, and last night the weather bureau set a predicted trajectory straight up the Gulf towards coastal rigs and refineries, with Gustav intensifying to a Category 3 hurricane as he goes. Oil turned around swiftly and traded up to US$117.50, however the biggest jumps were recorded in gasoline and natural gas. The Katrina experience showed that it is the oil products that suffer price spikes in stormy weather, rather than crude itself.
Nevertheless, a late report from the US Energy Department noted that oil demand continued to fall significantly in July, taking it to five-year lows. This clipped the rally, and oil finished the session up US$1.16 to US$116.27/bbl.
Gold joined the weather watch and defied a stronger greenback by rising US$3.10 to US$824.20/oz.
The LME had an extra day to catch up and base metals closed weaker. Traders report whip-sawing action as speculative funds haggle over the economy and oil and gold price movements, with little agreement. Copper lost 1.5%, zinc 2.5% and nickel 3.5%.
The financial sector received grim news late in the day from the Federal Deposit Insurance Commission, which reported its list of “problem” banks grew to 117 in the second quarter from 90 in the first. However, the numbers revealed that not one new bank accounted for a large portion of the deposits under threat, suggesting there is not another IndyMac on the immediate horizon. The financial sector closed slightly in the green nevertheless, pushed along by our favourite twins.
A view from financial sector analysts – that reports of Fannie & Freddie’s impending demise are exaggerated – is gathering pace. With a bit of help from the government, analysts declare, F’n’F have enough capital to see them through their problem loans at least until the end of the year. This implies an actual nationalisation may not need to occur at all, despite the suggestion of alarmist media reports. Fannie shares subsequently jumped 9% and Freddie 20%, although such movements are overstated when you’re trading in pennies.
Alarmist the media reports may be, but with one or two exceptions, the bulk of financial sector analysts in the US (and Australia) have called little right for more than twelve months now. (Oppenheimer is the notable exception in the US and JP Morgan in Australia).
However, there was some fundamentally good news out of commercial/investment banking giant Citigroup last night – news of cost cutting measures so decisive one wonders whether a call on the end of the credit crunch could not be made right here and now.
Citigroup has banned colour copies.
The SPI Overnight was up 6 points.
