FYI | Oct 17 2007
By Greg Peel
It was the turn of many US regional banks to report their third quarter earnings last night. Given no one was expecting anything other than poor results, more interest lay in fourth quarter guidance. And the story was just as Citigroup had suggested earlier in the week – credit problems will continue and the housing slump is far from over.
Indeed, US Treasury secretary Henry Paulson spoke last night, echoing earlier words from Ben Bernanke, suggesting the housing crisis is a significant threat to the US economy. Under this sort of dark cloud (and despite news a Chinese bank is sniffing around Bear Stearns) the market took a tumble once more.
The Dow closed down 71 points or 0.5%, although at one stage it was down 107 points. The S&P fell 0.7% and the Nasdaq 0.6%.
There was also a good deal of anticipation leading into earnings results in the tech sector, with Yahoo, and Dow components IBM and Intel all reporting after the bell. IBM’s earnings were solid but unspectacular, and its shares initially fell 1%. Intel’s result was much better than anticipated, and its shares jumped 5%. But the big winner was Yahoo, the shares of which have been marked down recently as the search engine specialist loses more and more ground to Google. Yahoo’s result surprised, and the stock jumped 10% in the after-market. There will be at least some positive momentum going into tonight’s session.
The other ongoing problem is oil, and crude continued its upward push last night, closing up US$1.48 to US$87.61/bbl. The close actually met with some profit-taking, as the price had passed US$88 earlier in the session. While concerns remain over US domestic supply levels going into the winter season, the current impetus is more about the Kurdish situation.
Iraq’s government has suggested there could be “very grave consequences” if the Turkish government obtains the required permission from its parliament to cross the border and attempt to put down Kurdish rebels. This does not mean Iraq would be at war with Turkey, as Turkey is a US ally and the Iraqi government would probably welcome the silencing of the Kurdish revolt, but another civil battle is hardly what the country needs right now. From oil’s perspective, a major pipeline passes through the disputed territory, taking Iraqi oil to the Mediterranean. However, this pipeline has been all but shutdown during the duration of the Iraq war, so oil traders are more concerned with the wider Middle Eastern implications.
Oil’s relentless rally harks back to a similar move last year, when oil hit its previous peak around the US$78 mark. That time it was all about the battle between Israel and Lebanon, and when that dispute was settled, the oil price tumbled very quickly. The implication is thus that oil is currently very volatile, as either an escalation or a resolution could send the price rapidly in one direction or the other.
The Kurdish situation is also having its effect on the gold price, which last night edged up another US$1.20 to US$759.80/oz. This move was in defiance of the US dollar, which bounced back against major currencies quite sharply last night.
The US dollar is reacting to the upcoming meeting between G7 finance ministers which begins in Washington on Friday and continues into the weekend. Speculation is that European and US representatives alike are worried about the strong euro/weak dollar, and want to do something about it. The dollar has only been going one way lately, so it was time to start squaring up. The Aussie dollar thus responded as expected and fell sharply to US$0.8884.
Commodity prices all took a tumble on the US dollar’s rise (with the exception of oil and gold). Silver played commodity against gold’s safe haven, and as such we had a rare night when the two diverged. Silver fell 1.2% in New York, while in London aluminium fell 1.1%, copper 2.5%, lead 4.6%, nickel 3.9% and zinc 3.7%.
Dow down and metals down. While more may have been expected, the SPI Overnight fell only 17 points.
