FYI | Aug 09 2007
By Greg Peel
The correction is over, say the bulls. You’re jumping the gun a bit, say the bears.
The correction certainly appeared to be last week’s news last night as the markets pushed steadily upward from the bell. The kicker was always going to be an after-market profit report yesterday from Cisco Systems that showed a 25% increase in second quarter profit. Tech is alive and well. The financial and home builder sectors also continued their recoveries.
June consumer credit came in with a 6% increase. This is good news to those fearing a consumer-led recession driven by housing and the credit crunch. But of course, we’re still talking June.
Nevertheless, the Dow pushed merrily onwards to be up 191 points at 2.30pm. But then all hell broke loose. A rumour hit the Street that American bellwether financial Goldman Sachs was set to announce some negative news after the bell. In one hour the Dow fell 201 points to be down 20 for the session.
The weakness may have continued if Goldman Sachs hadn’t come out and immediately quashed the rumours. Whoops – back we go again. The Dow turned tailed and rallied once more, finally settling up 153 points, or 1.1%. The S&P closed up 1.4% and the Nasdaq an impressive 2.0%.
There is little doubt that the market is envisioning a settling of the dust. There has been a slight down tick in corporate bond spreads. Money has begun to flow back out of US Treasuries. Ben Bernanke has galvanised the market by not easing rates and suggesting the economy is still strong enough and inflation is still a concern. This is not recession talk. President Bush even weighed in last night and reassured investors by suggesting there is no plan nor need to intervene in the markets. He also signalled his intention to veto Congressional plans to raise the tax rate on hedge and private equity funds. While expected, this was also good news.
But the Goldman Sachs incident brought back into stark reality the fact that this market is still extremely jumpy and prone to panic. Respected commentators are still expecting bad news to come from the financial sector, expecting a wave of bankruptcies, and expecting a significant lift in mortgage defaults. All this, they point out, will take time. All the news won’t be out in the Street by tomorrow. And if you look at Bernanke’s “modest” economic growth, the bears point out that US economic growth has been slipping quietly lower since 2006.
The VIX volatility index is still trading at its highs, suggesting insurance is just as heavily sought after this week as it was last week.
In the rest of the market, normal programming has been resumed. The US dollar continued to drift lower against major currencies, except the yen. Yen weakness suggests carry trade unwinding has very much ceased for the time being. The Aussie battler fought back strongly again with the help of the RBA hike to be back at US$0.8624.
There was quite a rush out of the ten-year bond, with yields surging nearly 12bps to 4.86%. Apart from money that was taken out of the stock market and put into safe keeping, and now back again, traders paid attention to sabre-rattling from China that suggested any step toward protectionist measures from Congress will be met with a wholesale sell-off of US dollar assets. Gold continued to rise, jumping US$2.20 to US$673.90/oz. Gold’s push has come in the face of some hefty European central bank selling (more on that later today). Oil ticked down slightly again to be at US$72.15/bbl. Base metals had their usual mixed day.
The Australian labour force numbers come out today. While clearly a post-hike irrelevance in the short term, the unemployment figure will still be closely scrutinised. As the local reporting season begins to gather momentum, today’s marquee report comes from Telstra (TLS).
The SPI Overnight was up 60 points.
