FYI | Jul 19 2007
By Greg Peel
[Breaking news: A transformer exploded in New York city shortly after 8am AEST causing damage to a building and initial panic among New Yorkers who are on high alert at present for an Al-Qaeda attack. There does not appear to be any connection to terrorism.]
Wall Street was always going to take a hit straight off last night following the Bear Stearns news that hit the market after the close on Tuesday night. Financials make up 20% of the S&P 500, and the subprime crisis was back to spoil the earnings party. JP Morgan Chase reported a 20% increase in quarterly profits – better than expected – and its shares fell 2.7%. The bank said it “remains on guard” against further fallout in the mortgage industry, and has increased provisions.
The June CPI release was a muted affair, with both the headline and core inflation posting 0.2% rises – matching closely the PPI release of yesterday, and also matching expectations. The headline figure was kept in check by gasoline prices which continued to fall in June from lofty highs despite rising crude prices. However, while the CPI was an important release, it coincided with testimony from Fed chairman Ben Bernanke to the House of Reps, and his comments were always going to override the actual number.
Wall Street was not enamoured with Mr Bernanke, and the Dow continued its downward trend towards a low of 134 points down mid-session. Bernanke suggested that the US economy would strengthen into 2008, that inflation, while improving, still remains the predominant concern and that things are only going to get worse before they get better in the housing market. He also noted ongoing erosion in the subprime market.
There was little new here, but enough negatives to add fuel to the fire of yesterday’s Bear Stearns announcement. Some commentators were of the opinion that the rally of the last few days was overdone on faith and not much substance. To top things off, the day’s earnings reports were of the weaker variety. However, in the last hour of trade the faithful returned, picking up supposed bargains and pushing the Dow back to be down only 53 points, or 0.4% on the day. The three major indices returned to alignment, with the S&P 500 down 0.2% and the Nasdaq down 0.5%.
The feeling was maintained that the Fed is on hold now for some time yet. US bonds drifted back once more to 5.01% and the US dollar continued its slide against the euro and pound. This was once again impetus for precious metals, and crude oil added more impetus besides.
Crude oil shot up yet another US$1 last night, closing at US$75.05/bbl for August delivery. The immediate catalyst this time was – omigod – inventories, which appear to be lower this week than expected. They’ll probably be higher next week than expected. Crude oil has run very hard very fast and is completely out of lockstep with the natural gas and gasoline markets, which have largely fallen. In terms of its price panic, commentators are making obvious comparisons to this time one year ago, when crude rushed up to US$78/bbl and quickly retreated a good US$15 thereafter. Crude is bubbling a bit too much for some analysts’ liking.
There was no holding back gold however, which posted a solid US$8.10 gain to break through the chart and hit US$672.50/oz. This is familiar territory. Can we put those thoughts of US$600/oz to bed now? If the pattern plays out once more, we should be looking at US$695/oz again fairly soon, before the games begin again. Unless, of course, the oil price collapses.
Base metals offered up their usual mixture last night, with aluminium and zinc down 1% in New York and lead up another 1.5%. Nickel also had an up day, rising 3%.
The SPI Overnight clawed back 11 points after the weakness of yesterday. Interest today will come from the release of the RBA bulletin, which will be scrutinised for signs of an August rate rise.
