FYI | Oct 16 2007
By Greg Peel
It was Citigroup’s turn to report third quarter earnings last night. America’s largest bank saw its earnings tumble 57%, with losses on mortgage-backed securities, leveraged debt and fixed income trading amounting to more than US$3 billion. The company also announced it would delay its share buyback.
While this was not good news, it wasn’t a shock either. Citi is simply the latest bank to air its credit crunch dirty laundry. But if Wall Street had decided the credit crunch was over following the 50 point rate cut (and as evidenced by new highs in the market), it was in for a sobering reminder last night that credit crunches just don’t end overnight.
US Treasury secretary Henry Paulson – a man under increasing pressure from across the globe as the US dollar slides into oblivion – has been in talks with America’s big banks recently – Citi, Bank of America, JP Morgan Chase and others. The result of those talks is that the banks are going to put together a fighting fund to save the asset-backed commercial paper market. While risk appetite may have returned to the quality end of the commercial paper market the asset-backed sector, which includes mortgage-backed securities, has never unfrozen. And banks across the country are still sitting on vast amounts of these securities, currently valuing them on a wing and a prayer.
The group of banks has thus committed to what is believed to be in the vicinity of US$80-100 billion as a bail-out fund to acquire such securities, including subprime paper, from Structured Investment Vehicles in an attempt to prevent the fire sale that hasn’t yet happened but has continued to look more likely. While this may be a form of good news for commercial paper markets in general it is ultimately a recognition of two things – the credit crunch is far from over and banks are going to end up spending money to try to bring it to an end. Back on October 1, when Citi flagged its third quarter profit result, the CEO suggested the fourth quarter would see a return to normal trading. He retracted that statement last night.
The Dow fell 108 points or 0.8% to slip back under the 14,000 mark (13,984). The S&P fell 0.8% to be under the 1550 mark (1549) and the Nasdaq fell 0.9%.
Also driving the market last night was the relentless rise in the oil price, which is bad news for everyone other than oil companies. Crude for November delivery jumped another US$2.44, or 3%, to US$86.13/bbl.
The rise in the oil price has caught many by surprise at a time of the year that traditionally sees a pullback. The driving season in the US is over and the heating season is yet to begin in earnest. However there is ongoing concern about domestic supply issues, and OPEC chimed in last night to suggest non-OPEC production is probably falling. Why you’d listen to anything OPEC says is anybody’s guess, but the market is rather edgy at the moment as geopolitical tensions reignite.
Ongoing tensions with Iran, and the indication by the Bush Administration that a military solution is definitely an option, have served to keep oil from slipping much below US$80/bbl and will probably continue to do so. However, the latest source of tension has been the battle between Kurdish rebels and Turkish forces on Iraq’s northern border. Turkey is seeking permission to invade the recalcitrant province, and this is what has been spooking the oil market.
Kurdistan as a nation does not exist, being split largely between eastern Turkey and northern Iraq when borders were drawn up by imperialists last century. The same borders ensure the rest of Iraq is part Sunni, part Shi-ite, and altogether very unhappy about it. But the Kurds subscribe to neither faction, and would very much like to have their own plot of land where they could get on with their own business. The problem is, the Kurdish area of Iraq is where a lot of Iraq’s oil is. No more needs to be said.
The rise in the price of oil is only being helped along by the falling US dollar, which continued falling last night. The dollar also fell against the yen, which it seems triggered a sell off in the Aussie overnight. The Aussie had pushed as high as US$0.9075 on inflation fears sparked by a possible tax cut battle among the election contenders, but it seems the US$0.90 mark may prove an area of consolidation. The Aussie fell to US$0.8988 last night.
Gold, on the other hand, has little to hold it back at present. A weaker dollar, surging oil price, and geopolitical tensions all served to push gold up US$10.50 to US$758.60/oz. Gold is also benefiting from a flight to quality as credit crunch concerns continue to play out. The question now is: were the stock market to hit a pullback from its highs if earnings reports disappoint, will gold once again be sold off for margin calls, or push on regardless?
Base metals in London all responded to the weaker US dollar, with copper, lead, nickel and zinc all up 2%.
The SPI Overnight lost 43 points.
