FYI | Jun 26 2007
By Greg Peel
The theme last night on Wall Street was one of housing data. The US National Association of Realtors noted that existing home sales declined in May by 0.3%. To many, this was good news.
Firstly, the fall was not large and secondly, it was as expected. There was no downside surprise. After a 185 point fall in the Dow on Friday, one camp decided this was sufficient reason to dive back in.
However, the pace of existing US home sales is now the slowest in four years. Housing inventories rose 5% in May to the highest level since 1992, and the median home price fell for a record tenth consecutive month. While the US housing market may not be collapsing into a vacuum, it is still very weak.
This may, nevertheless, be a good reason not to raise rates. But then the Fed is keenly monitoring inflation, and when there was a suggestion of refinery outages and the crude price rose back over US$69/bbl the mood changed. While no one expects the Fed to raise rates on Thursday, everyone will be keenly listening for signs of accelerated hawkishness in the Fed’s accompanying statement.
All in all, there appeared sufficient reason for investors to take profits out once more, particularly if they were caught out on Friday, and particularly given this is a rate decision week. And particularly given ongoing concerns in the sub-prime mortgage market. If the housing market continues to weaken, the mortgage market will weaken too, which then causes house prices to fall and so on we go. The Dow was up 128 points at one stage but closed down 8.
Reuters reports Merrill Lynch US analyst Guy Moszkowski wrote last night that bear Stearns may have to bail out a second troubled hedge fund that it manages, which holds some US$6 billion in sub-prime securities reputedly even more risky than those held by the hedge fund Bear has already bailed out for US$3.2 billion. The smaller fund had reported on the books a loss of only 5% in the four months to April 30, whereas the larger fund had similarly lost 23%. Those valuations are now nearly two months old.
Moszkowski suggested there’s a possibility that because the larger fund was known to be riskier, investors would not necessarily expect a bail-out. But it is not yet clear whether Bear Stearns will still need to provide some support. In the meantime, the Securities Exchange Commission has begun to circle, questioning why Bear restated the hedge funds’ April performance.
US equity investors would have at least been heartened by a fall in the ten-year bond rate from 5.14% to 5.08%. Before the Bear Stearns story broke, markets were concerned over a step up in bond yields. However, it is assumed that there is now a movement away from riskier, high-yield, low quality assets such as mortgages to the safety of less risky, high-quality Treasuries.
Elsewhere in the market activity was relatively quiet ahead of a raft of economic data and the FOMC meeting this week. Crude oil only closed up slightly, while gold drifted off again in what traders described as a very lacklustre market at present. Other precious metals slipped more significantly as the US dollar rose again against the euro. Copper rose 2% in New York however having fallen 2% in London, and lead again defied its name by leaping up 5.7% to carry on a 2.6% rise in London.
The SPI Overnight rose 3 points.
There will also be some attention paid to the Chinese stock market today, one assumes. In the face of an anticipated interest rate hike, the Shanghai Composite fell another 3.7% yesterday following a 3.3% fall on Friday.
