Daily Market Reports | Feb 05 2010
By Greg Peel
The Dow fell 268 points or 2.6% to 10,002 and is precariously poised above the psychological level. The S&P fell a more substantial 3.1% to 1063, breaching various support levels on the way. The Nasdaq fell 3.0%.
I noted in yesterday's Europe On The Brink that debt related issues historically suffer from contagion. From the Asian Currency Crisis of 1997 to the US investment bank collapses of 2008 there is ample evidence that if one goes, they all go. This is the fear that has begun to grip Wall Street.
Most traders made a very big mistake in 2007 – they thought the US subprime crisis was just a storm in a tea cup. A year later we had a GFC. This time Wall Street traders do not wish to be exposed to the same mistake, and have thus labelled little, innocuous Greece potentially the subprime of 2010.
Yesterday the Bank of England held its cash rate rate steady at 0.5% but announced a halt to quantitative easing measures due to inflation fears. The BoE will recommence buying bonds again only if necessary. The European Central Bank unsurprisingly followed with an unchanged 1.0% cash rate. No support for the euro there.
Having made their profits on Greek bonds, traders continued to attack the new target last night – Portugal. Greece is struggling with a public debt of 13% of GDP while Portugal is trying to deal with 9%. Greece has been forced to slash public spending by the ECB in order to satisfy EU requirements, and already trade unions are planning to strike against wage freezes. In Portugal, it has been reported that the Prime Minister has threatened to resign over a bill put to parliament which the government suggests will make it harder to cut the deficit.
Spain – an economy half again as large of that of Australia – announced its 2009 public debt measure would be higher than the 11.4% of GDP previously forecast. Both Portugal and Spain have vowed to reduce these numbers to within the EU's 3% limit by 2013. For Greece it's 2012. At this stage only Greece is under EU "protection" with the proviso the government can explain within one month exactly how it's going to slash its deficit.
Last night the spreads on credit default swaps for Iberian sovereign debt blew out above those of the largest American companies. In other words, the market now sees the like of Exxon as a better chance of survival than Spain. Troubles in Portugal were exacerbated when on Wednesday the government cut a government bill auction back from 500m euros to 300m euros. Why? No demand? The problem with such incidents is that they snowball. If Portugal cannot raise funds to pay for its deficit, because the market fears it may not be able to service that debt, then it will be unable to service that debt. We recall that Lehman was alive one day and gone the next, simply because its credit lines were pulled on fear, not on reality.
European stock markets were all down 2-3% last night. Shares in Spain's (and the euro-zone's) biggest bank, Banco Santander – fell 4.4%. Last year Banco Santander capitalisation was such that it was able to pick over the carcasses of British banks.
For Wall Street, European fears have now been joined by Chinese concerns – not of stimulus tightening but of Chinese threats to boycott US companies over the US government's deal to sell arms to Taiwan. For example, Boeing is in on the deal to provide military equipment, but Boeing also supplies about half of China's commercial airliners. If China pulls the pin on Boeing?
And just when Wall Street thought at least life is safer at home, the weekly new jobless claims number arrived. Economists are hoping for at least an increase in new jobs of 5,000 in January when the numbers are released tonight. On that basis, they were hoping for a drop in weekly claims but instead they got an 8,000 increase. Doubt has now surfaced. Despite expecting an increase in jobs, nevertheless, economists were expecting an increase in the US unemployment rate from 10.0% to 10.1% tonight.
All these factors conspired last night to send the US stock market tumbling through support levels. The sell-off came on heavy volume, and accelerated toward the close. Positive earnings results, specifically including a very good result from Cisco in the after-market on Wednesday, went out the door.
As money flowed out of the euro-zone it flowed into supposed safer havens – Switzerland, Japan, and of course the US. It also flowed into German bonds as the only true safe haven within the euro-zone. As the euro was sold down to seven month lows, the US dollar index shot up 0.7% to 79.92. This was not good news for commodity funds sitting high and dry on reflation-trade positions put on in euphoric late 2009.
Base metals all fell 2-4% in London. Oil had its worst day since July, falling US$3.84 or 5% to US$73.18/bbl.
Gold was slaughtered, dropping US$47.70 or 4% to US$1060.70/oz. Silver fell 6%. The Aussie dollar lost near two cents to US$0.8656.
Last month the VIX volatility index on the S&P 500 – in these times a measure of demand for put option protection – fell to well under 20 for the first time since May 2008. When the index falls below 20, typically it indicates the market has become too complacent. May 2008 saw the fatal end of the brief Bear Stearns rescue rally. January this year saw another market peak. Last night the VIX jumped 20% to 26.
The SPI Overnight fell 134 points or 2.9%.
Wall Street will be hoping tonight's jobs number will be sufficiently positive to help put on the breaks. If it's negative…
[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]
