FYI | Jun 27 2007
By Greg Peel
News from the sub-prime mortgage market last night was mixed. Uncertainty is still the order of the day.
Bear Stearns has announced that it won’t need to spend a full $3.2 billion to bail out the smaller, and less risky, of its two funds. That figure has been reduced to US$1.6 billion. However, its larger (US$6 billion) and riskier fund will be left to the dogs. There will be no bail-out. It has been suggested that as the riskier asset, investors in this fund are experienced enough to know that que sera sera.
This is not now the end to the story. There is a very popular analogy going around town which has been picked up by everyone from Associated Press to Fairfax columnists. But I like it, so I’ll use it too.
There is a house burning in the street. The firemen have arrived, and appear to have things under control, but the house will be extensively damaged. There is still a clear risk however, that the fire could spread to adjacent properties. And drifting embers are a threat to properties further down the street as well. The firemen are fighting hard, the whole street is out watching, precautions are being taken in neighbouring houses but there is still a very real danger of a more major fire. Only time will tell.
What is very clear is that the bloke at No.6 won’t be carelessly smoking in bed again any time soon. But then that message always seems to fade in the end.
More on the sub-prime crisis later today.
At lunch time in New York last night the Dow was up exactly 100 points. This was its second attempt to rally back from the 185 point fall on Friday sparked by Bear Stearns. Again the rally failed. US equities have been very volatile in a week where there is a slew of economic data amidst the mortgage crisis. But with the Fed meeting tonight, there is also caution. The Dow closed down 14 points at the bell.
Earlier support was found when the crude oil price began slipping on news that the strike in Nigeria had ended. There were also more positive views on inventories, but this seems to be a number that changes from day to day. Crude finished the session down 2% to US$67.77/bbl. A lower crude price eases inflation fears, but also affects the oil companies in the Dow.
Next came the May new home sales figure which was down 1.6%. As with the existing homes sales figure the night before, this number was no worse than expected, but a fall nevertheless. May becomes the fourth month in five this year new home sales have declined. April was the blip, with a 12.4% increase. June consumer confidence also fell to a 10-month low.
But at the end of the day, mortgage uncertainty was claimed as the reason for weakness, along with anticipation ahead of the Fed rate decision on Thursday. While no one expects rates to rise, traders are keen to learn of the Fed’s inflation views.
It was a bad night for precious metals, exacerbated by options expiries in gold and silver. Gold fell US$11.10 to US$640.00/oz – the lowest level since mid-January – while silver fell a whopping US$0.60 or 4.7% to close at US$12.20 – the lowest level since October. While crude oil would have aided in gold’s fall, the US dollar remained stable against the euro but did rise against the yen. There is little physical buying support at present as we are in between Asian gift seasons.
Base metals also suffered significant falls, lead by lead. Lead has skyrocketed in recent sessions but last night it seemed enough was enough and the metal fell 5.5% in London, sparking off general selling across the spectrum. Aluminium fell 1%, nickel 4%, zinc 4% and tin 1% in London. The mood carried through to New York, particularly in recently volatile nickel which closed down 7% – its third 7% fall in a week. Aluminium closed down 0.5%, copper 1.5%, lead 4%, and zinc 2%.
The SPI Overnight shows a rather weak close of down 32 points, metals prices clearly adding to Wall Street weakness.
