FYI | Mar 05 2007
By Greg Peel
It was not going to be a weekend for the bold, as the fallout from last week’s wake-up call on extensive risk continued into a Friday liquidation session. Fears of a liquidity crunch and growing concerns over the sub-prime mortgage market in the US sent the Dow Jones down another 120 points to end the week on 12,114. The 1% fall was matched by the S&P500, while the Nasdaq slid another 1.5%.
All major US indices have now wiped out their 2007 gains and headed into negative territory.
A bumpy ride is undoubtedly ahead, although the pervading view on the Street is that this is a necessary correction in an otherwise overblown market. This week’s economic data will be closely watched, as will the performance of the yen against the US dollar. The yen rose last week as carry-trade positions were rapidly unwound. The potential for such unwinding is enormous, but consensus is that this is not the beginning of the end – merely a shake out that will clip the wings of some of the more cavalier investors.
Whenever a correction is triggered in financial markets, it is always those instruments/commodities that have risen the most that have the furthest to fall. Thus is the precious metals market has borne the brunt of panic liquidation, particularly from the gold-mad Chinese who started the whole thing on Tuesday.
Gold was down another US$20-odd on Friday night, settling for the week at US$640.80/oz – down 3.5% for the session, and now down over 7% from its high on Monday. But it has been little brother silver that’s really copped it. Down another 5.5% on Friday to US$12.82/oz, the recent star performer has now lost close to 12% from its highs of over US$14.50/oz.
There is not a lot of careful consideration going on in precious metals at present. As respected market analyst Dennis Gartman noted: "Nothing has changed fundamentally although much has changed psychologically".
With China under pressure, Gartman suggested "it does not take a great deal of wisdom to discern that liquidation of profitable gold positions would be undertaken by those suffering material losses in their equity trades".
The jitters have extended to the base metals markets with copper and nickel posting falls on Friday of around 1%. But the big loser was zinc, which had been recovering ground from its big tank a couple of weeks ago. It was down over 4.5% and continues to keep metal investors awake at night.
The local bourse will be in for a weak start to trading today, with the SPI Overnight for Friday settling down 59 points. Bellwether BHP was down over 1.6% in US trading.