FYI | Feb 28 2007
By Greg Peel
A rumour began in China yesterday that the Chinese government would intensify its austerity measures intended to crimp a raging economy by introducing a capital gains tax. The Shanghai index fell 8.8% from its record high the day before – the biggest single day fall since the death of Deng Xiaoping in 1997.
Markets in Asia were not overly fazed. Hong Kong fell 1.8% and Singapore 2.3%, while Japan and Taiwan fell only modestly. The reality is that the Chinese market sailed through yesterday’s closing level only two weeks ago, such is its level of volatility.
However, Western markets have been teetering lately on fears of an overdue correction and uninspiring earnings guidance in the US. While economic data out of the US recently have belied talk of a weak economy, former Fed chief Alan Greenspan unsettled investors on Monday by suggesting a US recession was still possible later in the year.
The two elements combined to send Western markets into a tailspin overnight. London’s FTSE 100 was down 2.3% and France’s CAC and Germany’s DAX were both down 3%. The DJIA finished down 416 points or 3.3% to 12,216, with similar falls posted in the Nasdaq and S&P500.
This was the biggest points fall since the market reopened after 9/11, and at one stage the Dow was down 546.
A potential braking of the Chinese economy caused a screaming halt to the recent positive mood in commodities. As a major consumer of commodities, a slowdown in China is significant.
Nymex crude oil futures fell 1.7% to US$60.33/bbl. In the base metal complex, copper was the hardest hit falling 3.8%, while zinc dropped 2.2%. Nothing can stop nickel at the moment though – it rose 1%.
Chinese gold buying at the retail level has been one significant driver of the gold price lately, so it was no surprise gold took a hit. Money also flew into US bonds as a safe haven. Major gold EFT selling occurred during the stock market trading period, with the benchmark StreetTracks fund falling 4.6%. EFT custodians waited to after the close of the gold futures market to dump the required physical, and hence the metal collapsed late in the day, falling US$23.20 or 3.4% to US$662.90/oz. Silver fell 3.75% to US$14.13/oz.
The outlook looks bleak for the day on the local bourse, with the SPI Overnight closing down 170 points or 2.8%. BHP Billiton (BHP) and Rio Tinto (RIO) were both trashed in London, falling 6% and 5% respectively.