FYI | Mar 14 2007
By Greg Peel
It’s not quite as certain as death and taxes, but it’s usually a fairly safe bet that any correction rally will be hit with a second wave. While global equity markets have done their best to recover significant ground following the Shanghai Surprise, fear levels have been heightened and trigger fingers have been shaky. And there are always those sellers who missed the boat the first time.
Such it was that Wall Street was creeping up to the front line, while set to turn and run at the first sign of trouble. Any excuse for trouble. The pall of sub-prime mortgage problems has been hanging over the market these last few weeks, as has fear of a surge in yen carry trade unwinding. As it turned out, it was disappointing economic data that tipped the balance.
Before the market opened, February retail sales data were released showing only a 0.1% rise when consensus was for 0.3%. Significant within the figures was the ex-autos number, which actually fell 0.1% against consensus of a 0.3% rise. Oh no, get me out.
The reality is that these figures are hardly the sign of an economy rushing towards recession. They will not affect predicted 2% real growth in GDP in the first quarter, and economists have pointed to the burst of unseasonably cold weather in February that kept shoppers indoors. But the market will take anything at the moment.
The Dow Jones declined steadily all session long, finishing down 242 points to 12,076 – a fall of 2%. Both the S&P 500 and Nasdaq were also down 2%. Adding fuel to the fire was more bad news on the sub-prime mortgage front – the current spectre du jour.
The latest company to wave the white flag is Accredited Home Lenders, which lost 70% of its value last night when it announced it would need to borrow to cover defaults. The CEO of the largest mortgage lender – Countrywide Financial – also appeared on tele to say the sub-prime issue had become a “liquidity crisis”. Despite efforts by the likes of Fed chairman Bernanke to assuage fears, the sub-prime situation has reached a snowball level where default begets default. Whether or not this is an overreaction, the S&P Financials sector copped a 3.2% sell-off.
The general mood then naturally spilt over into the yen carry trade market, which saw further unwinding of positions that pushed the yen up 1% against the US dollar.
A manifestation of current market anxiety was provided by the Chicago Board of Trade Volatility Index (VIX) which leapt 30%. This indicates nervous investors are rushing to buy protection against further declines.
As FNArena suggested yesterday, gold had stalled on low volumes at the significant US$650/oz level and was looking for some new direction. What should gold follow? The dollar? Oil? Equities?
Well oil and equities won out last night as the Dow fell and Nymex crude lost another 1% to US$58.20/bbl. Economic data added to thoughts that the inflation scare was abating. Gold slipped around US$7 and is now hovering around important support levels in the low US$640s. Gold watchers will not rule out further weakness.
Base metals also copped the brunt of ill feeling last night with aluminium, zinc and nickel all losing around 2% and copper tanking 4.75%.
The local bourse had already decided a three-day rally, and further strong opening on the fourth, was enough yesterday, and as good as tipped a down night in the US. The SPI overnight is pointing to 1.4% of losses today, down 82 points. A second wave sell-off scares many into believing the correction has much further to run, but bargain-hunters will be keeping a watchful eye. Market direction this week will hinge on just how much the world sees the Wall Street mortgage crisis as fundamental, or possibly as overdone. As always, however, volatility levels are on red alert.