FYI | Jul 31 2007
By Greg Peel
Investors in the Australian market were no doubt weighing up yesterday whether the previous week’s falls on Wall Street were (a) the precursor of more falls and (b) a contagion that Australia is really exposed to. In the end the buyers won the day, spurred on by an almost oblivious rally of 2.2% in the Shanghai Composite. If China is strong, then Australia should be strong.
The Dow was down over 50 points in early trade but recovered steadily to close up 92 points or 0.7% on the day. The S&P was up 0.8% and the Nasdaq over 1%. It was a relief rally in a day that largely saw everything that went one way last week heading the other way last night.
The US dollar resumed its fall against the euro while yen buying steadied, allowing the Aussie to recover about US0.5 cents from its lows. The US ten-year bond saw some selling as yields moved from 4.77% to 4.81%, and gold was able to recover some of its lost ground, rallying US$5.30 to US$664.80/oz. Oil fell slightly and base metals were mixed and relatively calm.
The most notable turnaround was probably in the VIX volatility index which fell 13% from its Friday high, suggesting an easing of panic buying of protection. Ironically, the VIX has become quite volatile.
The steadying ship was probably most evident in the US financials sector, which has copped most of the brunt of the selling. The sector’s flat performance in the face of a 200 point Dow fall on Friday was an early indicator the market had already considered the sector oversold, at least in the short term. The scene was thus set for a bounce last night, and the fuel was provided when Standard & Poors upgraded Morgan Stanley, noting that the investment bank’s exposure to the credit crisis was manageable.
More positive banking news came out of the UK, with HSBC reporting a 25% increase in first half profits. General Motors lending arm, GMAC, posted a loss as one would expect but GM’s stock price rallied 5% on guidance that a third quarter recovery was on the cards.
Banking sector news was supplemented by wider market profit reports that were both good and bad. Sun Microsystems, for example, shot up 9%. The trend remains at 14% growth in second quarter profits so far. After the bell, UK pharmaceutical giant GlaxoSmithKline received notice from the US FDA that its diabetes drug did indeed increase the risk of heart attack, but would not be banned. The stock jumped 5% on the news.
All in all, just the sort of relief rally one might expect after a week of carnage. But has it answered any questions? The bulls are back feeling smug again of course while the bears are not surprised and point to more pain to come. Is this the eye of the storm? There is a raft of economic data set to hit the US market this week which will no doubt fuel volatility and be seized upon by either camp. The consumption numbers tonight will be particularly scrutinised, although the bears maintain their mantra that any data is rear-view mirror stuff. It will be next month’s, and the month after’s data that will provide greater clarity. It’s not over yet, they warn.
