FYI | Mar 07 2007
By Greg Peel
There is something very scary about a stock market that closes on a Friday at weekly lows in a period of nervousness. It’s no coincidence that throughout history the word “Black” is usually followed by “Monday”. 1929 is a good example, as is 1987. Of course in Australia, our “Blacks” are thus mostly a Tuesday.
When the Dow dropped about 5% rather suddenly on an October Friday in 1987, after a seemingly endless rally, many investors welcomed the correction. But others had a think about it on the weekend, and the Dow dropped 25% on the Monday. When Australian investors had a chance this weekend to reflect on what might be happening, they didn’t wait for another major move in the Dow, they just went for their own scary Monday.
But with sufficient reassurance about the place that this was not the end of the world, the bargain hunters moved in. Asia was in a similar mindset. There was no waiting for a signal from across the Pacific this time, and before we knew Tuesday saw the Australian market recover 2%. Hong Kong recovered 2% and Japan 1%. It was further comfort that the notorious Shanghai A shares also put on 2%. Asia collectively spurred itself on.
The first response of equity markets in Europe is usually to move on reflection of the previous day’s direction in the US. Not last night. Europe saw Asia flying, and fell into line. The UK, Germany and France all rose 1%.
Thus it was that beaten and battered Wall Street traders, confused as to just who’s running the world these days, took the hint. The Dow put on 157 points or 1.3%. This represents about a quarter of last week’s losses.
The rally came despite Fed chairman Bernanke having some tough words to say to Fannie Mae and Fannie Mac. These two government-sponsored enterprises (GSE) are the biggest buyers of mortgages in the US. It has been the teetering mortgage market that has added fuel to the fire of last week’s weakness.
Bernanke entreated the Fannies to adjust their substantial portfolios to include more “affordable” housing. He was not specifically attacking sub-prime loans however, as both have already suggested they will stop buying them.
"Legislation to strengthen the regulation and supervision of GSEs is highly desirable, both to ensure that these companies pose fewer risks to the financial system and to direct them toward activities that provide important social benefits", said Bernanke, to a gathering of bankers in Hawaii.
Congress has tried in the past to do just that, without success. It is interesting to see how much the Fed is prepared to weigh into what is largely a political argument as much as a financial one. Mind you, after every sharp correction there are calls for more regulation. Never makes any difference in the end. A market is still a market.
Speaking of markets, gold managed to reverse its freefall in the generally positive mood last night, rising US$11.70 or 1.8% to US$646.70/oz. The PGMs responded with 2% rises, and battered silver recovered 2.7% of over 12% in losses, closing at US$12.91/oz.
The base metals were not going to be left out, with copper, nickel and zinc all up 2.25-2.75%. Oil was also slightly higher.
The SPI overnight put on another 41 points.
Is it all over? Can normal programming be resumed?
It would be a naïve trader to call the end of a correction so soon. While today will likely see a continuation of strength in the local market, there are always those investors who haven’t sold so far poised to make sure they don’t get caught out twice. Corrections are never as simple as down followed by up. There will be plenty of volatility ahead.