FYI | Jul 06 2007
By Greg Peel
Those Wall Street traders who aren’t on holiday and did manage to stagger into work after Fourth of July festivities last night arrived to find the Shanghai Composite index down 5.25%. Such moves are becoming more and more common in China, so it wasn’t a case of panic stations but nevertheless something to keep an eye on.
The Chinese stock market has been anticipating an interest rate rise for a couple of weeks now. These usually occur after the close on Friday so the recent pattern has been to sell off ahead of the weekend. The market has not recovered a lot in between so overall Shanghai has been ticking lower while the rate pall hangs over the market. How long this can be kept up is anyone’s guess, and realistically Chinese officials are achieving the desired result – taking some heat out of the stock market – by simply looking threatening. Nevertheless, as food inflation begins to make its mark in China there will need to be some sort of actual move made.
Adding to early negative sentiment on the Street were broker downgrades on General Motors and Coca-Cola, which is a bit like downgrading apple pie. Movements in the hotel sector following the Hilton bid were not enough to offset and the Dow was down 64 points at its low before the ISM non-manufacturing index saved the day.
The two ISM indices – manufacturing and non-manufacturing – are only surveys but they are held as reliable indicators for the US economy’s health. The former relates to widget producers and the latter to hairdressers, insurance salesman, advertising executives, management consultants, telephone sanitizers – basically everyone on Douglas Adams’ “B Ark” (but including IT, which ironically Adams pre-dated). The widget index surprised on the upside earlier in the week, while the services index announced last night saw a better than expected rise from 59.7 in May to 60.7 in June.
The Dow then rallied back to be down only 11 points at the close – the market deciding that hints of a strong economy are more bullish than potential rate rises are bearish. This was borne out by the fact that the US bond market was actually sold off rather violently last night, with yields rising from 5.04% to 5.14%.
Elsewhere in US equities the Nasdaq rose 11 points or nearly 0.5% as the world comes to terms with Steve Jobs’ new iPhone, which threatens to be the biggest thing in communications since Alex Bell said “Can you come here please…whatsaname”.
Despite the bond sell-off, the US dollar reclaimed ground against the euro as the ECB decided to keep rates steady for now. This was not unexpected, and the accompanying statement from Jean-Claude Trichet implied a rise was still likely later in the year. The US dollar also rose against the yen, and the pound. The latter came despite a widely expected rate rise from the BOE, which was also accompanied by warnings of further rises to come. The pound is currently trading at a more than 25-year high against the greenback.
The US dollar bounce – not totally surprising after a very soft week – was enough to allow gold traders to lose confidence once more. Gold fell US$4.40 to close at US$649.40/oz and look unloved. The fall came despite oil ticking further north, although another assault above US$72/bbl failed later in the day as the US announced – guess what – higher inventories. Base metal movements overnight were fairly negligible.
The SPI Overnight closed down 15 points following a surprisingly strong day on the local bourse yesterday, led by the usual resource stock shenanigans.
