FYI | Sep 06 2007
By Greg Peel
In a market desperately hoping for a Fed rate cut, recent data have been interpreted somewhat in reverse. Good news is bad news because it lessens the chance of a rate cut, and bad news is good because it increases the chance. But last night on Wall Street it seemed all news was bad.
The Dow closed down 143 points, or 1.1%, having been as low as 200 points down during the session. Once again a latish rally transpired, suggesting few traders are currently taking their positions home overnight in this time of uncertainty. Volume on the NYSE was again slightly higher than the day before, without being large. The S&P also fell 1.1% and the Nasdaq 0.9%.
Weakness took over the market early as the National Association of Realtors announced pending sales of existing homes fell in July to the lowest level in nearly six years. The ADP employment report showed US private employers added an estimated 38,000 jobs in August, which was a lot fewer than the market was expecting. While both these numbers are weak, and point to a slowing US economy and a better chance of a rate cut, the market simply saw them as weak and thus sold stocks.
Later in the day the Fed released its beige book, which is a general assessment of various regions in the US and the strength of their local economies. While the Fed conceded that the credit crunch was having a definite impact on the capacity for home buyers to raise a mortgage, it also suggested that areas of the economy outside of housing were still reasonably robust. What does this mean? Less chance of a rate cut, or at least of a big rate cut. So they sold it again.
While the data was playing havoc with sentiment, the yen had turned back up against the US dollar once more. The yen has become a day-to-day proposition, where one minute it looks like carry trades are going back on and the next minute they’re coming off again. One thing has become clear and that is the yen has become the leading indicator. Stocks in Australia turned strength into weakness as yesterday progressed, in line with a turnaround in the yen and another liquidity injection in the banking system by the RBA.
Weakness continued into Europe, where apart from yen movements the focus is very much on the London interbank overnight rate (LIBOR). This is a traditional cash rate for unsecured loans between banks used not only as the benchmark in Britain and Europe but to a great extent in the US as well. LIBOR has been rising steadily over the US Treasury bill rate, and this has a lot to do with why the global commercial paper market remains all but frozen. Even a percentage of US adjustable rate mortgages are set at a spread to LIBOR, so the credit crunch is going to provide double pain as those mortgages reset to higher rates over the next months.
London’s FTSE 100 and the German DAX both fell 1.7% last night.
The US dollar was down against all major currencies. While US Treasuries have been acting as the safe haven indicators of a weaker US economy ahead to not support dollar strength. The Aussie fell again, however, responding to a higher yen. Gold held its own, down only US$0.80 after rallying US$10 on Tuesday. Gold is not reacting at present to stock market falls, but is being propped up by safe haven support. However, were the stock market to suffer another sharp fall there is no reason why gold couldn’t be hit by sellers once more. The market is still wracked with uncertainty.
Base metals were once again weak. Metals ignored Tuesday’s rally in US stocks to focus more closely on building inventories, and fell sharply. Last night’s weaker US economic data only served to amplify fears that a slowing US economy would reduce metal demand. Nickel and zinc led the charge, each falling 4% in London.
The oil price continued to rally last night, driven along by weather concerns, inventory concerns and Tuesday’s announcement by OPEC that it was not looking to increase production. Oil for October delivery rose US65c to US$75.73/bbl.
After suffering an afternoon pullback on the local bourse yesterday, the SPI Overnight was down 61 points.
