FYI | Jun 21 2007
By Greg Peel
Question: If you took M&A activity out of global stock markets, where would we be? As the last of the prospective privateers abandoned the Coles (CGJ) bid overnight and packed their bags for Dallas, a rising number of pull-outs in the US in the face of higher bond yields dawned on Wall Street late in the session.
The previous two sessions had been dominated by weak but not quite as weak as expected US housing figures. Given Wall Street has been in a mood that any not so bad news is really good news, the Dow has ticked up, aided by a pullback in bond yields to 5.09% from previous highs around 5.3%.
It was a similar start to the morning last night, with no major data resulting in a unchanged market around lunch time.
The first sign of trouble came when across the Atlantic European central bankers expressed inflation concerns and European bond prices began to tumble. This sent the sellers back into the US bond market and yields rose once more – trading up to 5.14%.
Then billionaire Kirk Kerkorian’s investment arm said it was ending discussions to potentially buy MGM Mirage’s Bellagio hotel-casino and CityCenter project. The casino operator fell 7.1%.
But the real scare came when JP Morgan announced it was cancelling its bids for the assets of two hedge funds – totalling US$800m – which had been previously seized by Bear Stearns.
The word around the Street is that private equity players are beginning to think a lot harder about what they might want to buy. With bond yields pushing higher, internal rate of return requirements mean buyers cannot afford to offer the same premiums as they have been to date. At the same time, shareholders have become more wary of these offers, forcing the pirates to pay higher premiums in order to wrest control. It all adds up to a slowdown in M&A euphoria.
In last hour carnage, the Dow closed down 146 points or 1.1%. The Nasdaq was down 1% and the S&P 500 1.4%.
It’s an important night in the US for economic data tonight. Jobless claims will give a clue to the state of the labour market, leading economic indicators are released, and the Philadelphia Fed releases its state-of-the-economy report – seen as a reliable bellwether for the US economy as a whole.
Aiding the fall on Wall Street was a sharp correction in the oil price, which dropped close to a dollar to close at US$68.19/bbl for July delivery. (August slipped to $68.86/bbl as the July contract expired, so take into account a 70c odd rollover adjustment in tomorrow’s price). Oil fell on news that US inventories are as high as they have been for nine years. This news has at least eased some of the fears surrounding the resurgence of geopolitical tensions, particularly in Nigeria.
A falling oil price and rising bond yields were not the ticket for precious metals, with gold falling US$6.10 to US$654.50/oz and silver US17c to US$13.14/oz. Once again there is conundrum at play, as inflation concerns are currently driving bond yields, and gold is a hedge against inflation. However, higher bond rates mean a higher implicit cost of holding gold, given gold is an asset that does not provide an income stream. Nor has it helped the gold price that current long positions are deemed to be of the nervous variety, and that we are in a break between Asian buying seasons.
Base metals were relatively stable last night, with nickel only posting a 1.3% fall to US$17.29/lb in New York. After two days of mayhem, which saw nickel drop 14%, the price is now a good 28% off its May highs. Is this self-fulfilment? Most analysts have been calling a correction for a while now as supply begins to sneak up and Chinese stainless steel demand begins to wane at lofty prices. The question now is: how far is too far? Talk of a 50% correction from the highs has been heard.
I am loathe to call the local market this morning, having been bitten in my predictions by two days of tantalising Tinto, so let’s just report that the SPI Overnight closed down 47 points. In the meantime, could it now be that Wall Street traders are out of the river and peering out nervously out from behind the Sphinx?
