FYI | Oct 19 2007
By Greg Peel
It’s no secret that the top item on the agenda of the G7 finance ministers’ meeting this weekend will be the sliding US dollar. Had the world’s economists any faith in the G7’s capacity to either arrive at a consensus or indeed affect any change then perhaps dollar trading would have been steady these past few days. But last night the dollar went into freefall once more, before recovering at least some ground later in the session.
The main spark to yet another dollar tumble was the release of the weekly jobless claims figure. Now – many a commentator finds the official monthly employment data a fairly useless immediate indicator, given the magnitude of revisions that regularly occur in successive months. As the for the weekly jobless claims, well this can be an even more volatile figure to boot. But focus at present is on recession, and recessions are all about jobs – or lack thereof.
Last week the number of US residents filing for unemployment benefits rose 28,000 to 337,000. This was the largest jump since February. The number could quite easily be very different next week unless, as is the fear, a trend has developed. This was the figure that set the dollar off, aided by bad news from Bank of America.
The theme this week has been poor earnings results from America’s national and regional retail banks, from Citigroup to Washington Mutual and beyond. It’s was BA’s turn last night, and once again the bad news was not so much BA’s 32% loss for the quarter (although this was worse than expected) but its outlook for the fourth quarter. While many on Wall Street are hoping the credit crunch has played itself out now, BA suggested we may be closer to the beginning than the end.
And all this means, of course, that another Fed rate cut at the end of the month has become more likely. In fact, last night the Fed funds rate futures shifted the indicative odds of a rate cut from 53% to 74%. It didn’t matter that a release of the September leading indicators signalled only a gradual economic slowdown, or that the Philadelphia Fed index was weaker but not excessively so.
The US dollar fell again against all currencies. The dollar index, which in the past had never breached 80 since its measurement inception in 1973, fell to another new low at 77.6. As the dollar also fell sharply against the yen (yen higher) concerns were raised that carry trade unwinding may have set in again, but the Aussie rallied to US$0.8965, suggesting this is everywhere a US dollar phenomenon.
US ten-year bonds made another big move again – from 4.55% to 4.50% – as traders continue to reverse inflation concerns in the expectation of a rate cut.
Gold soared. As the US dollar tumbled, gold jumped US$11.60 to US$766.20/oz, further spurred on by another big up-day in oil. While profit taking was apparent in oil on Wednesday, on confirmation that Turkey intends to move into northern Iraq, fresh buying returned last night as the situation escalated. Oil leapt another US$2.52 to a new all time high of US$89.57/bbl.
Base metals were not quite so enthusiastic, despite the dollar’s fall. Trading was mixed in London although aluminium’s 2% rise was a bit of a change for the recently most boring metal.
As for the stock market – well – the same theme played out again. Jobless claims and Bank of America encouraged early weakness, while renewed belief in a rate cut sparked later buying. The Dow lost 3 points or 0.03%, and the S&P lost 0.08%, while the Nasdaq jumped another 0.2% on the back of the can-do-no-wrong tech sector. EBay’s strong result in Wednesday’s after-market had set the tone. Last night’s after-market saw the release of the much anticipated Google result, which did not disappoint, beating the market with a 46% profit increase.
Google has become the golden child of tech, mowing down the competition as it snatches market share ands builds it empire. While Google has become so ubiquitous in Australia that the verb “to google” has become part of the everyday lexicon, the case has not been the same in the US until recently. Earlier search engines such as Yahoo! and AltaVista used to keep the upstart at bay, but this is no longer the case. (Can you imagine someone saying I just Yahoo!ed your name?). Google has run from the low 500s to the low 600s in just a month, leaving the market caps of traditional Dow components in its wake. (Google is not in the Dow).
After quite an impressive day on the local bourse yesterday, the SPI Overnight was down 21 points.
As if to back up BA’s worrisome outlook on credit markets, late news has informed that a Structured Investment Vehicle (SIV) owned by Germany’s IKB – the first bank to be bailed out when the credit crisis struck – has failed to meet capital requirements and will be forced to sell US$1.2 billion of commercial paper. Last week US banks got together under encouragement from the US Treasury to create a fighting fund to support the frozen asset-backed commercial paper market, largely to ward off a valuation collapse were holders to begin a wholesale fire sale. There is a lot of commercial paper still out there, sitting on balance sheets at dubious valuations.
