FYI | Oct 25 2007
By Greg Peel
Leading investment bank Merrill Lynch reported a shocking result last night – far worse than guidance of three weeks ago had suggested, far worse than the market anticipated, and by far the worst of all the Wall Street brokerages. Merrills reiterated Citigroup’s call of last week that problems in the credit market were far from over, and that a recovery would not be coming in the fourth quarter.
This was enough to send stock markets into a tailspin, the Dow falling 206 points to its lows in the morning. While Merrill Lynch fell 6%, over at the Nasdaq traders had spent time dissecting Tuesday’s after-market Amazon result and decided it was actually pretty bad. Amazon lost 14%, and suddenly the tech sector lost faith.
Assisting overall weakness was the existing home sales report, which showed sales fell 8% in September to the lowest level in eight years, while median house prices have fallen 4.2% over 2007. This news supported the growing view that not only is the housing slump still present, it’s accelerating.
The Dow held its lows through lunch until suddenly a rumour began to spread: The Fed is going to make an emergency rate cut!
What a lot of bollocks. But they believed it, or at least didn’t want to be the only wood duck who didn’t, and the Dow rallied all the way back to close unchanged on the day. Why the Fed would make an emergency cut one week ahead of its official meeting is anyone’s guess.
And why the market should respond so sharply to such a rumour is another mystery. The Dow is back near its highs because of the first Fed cut. Nothing has changed, but now they’re getting all excited about another Fed cut. And if the Fed does make another 50 basis point cut (or even 25) it’s only because indications are that the US economy could well go into recession. Another Fed cut has become increasingly expected for about the last three weeks, but still today’s silly rumour managed to reverse a 200 point drop.
Not so for the golden child tech sector, however. The Nasdaq finished down 0.9% for the day while the S&P ultimately closed down 0.2%.
Markets elsewhere were not sure how to respond. Bonds were fairly sure, with the US ten-year continuing to anticipate the cut and slipping now to 4.34%. The US dollar was mixed however, falling against the yen for the first time in a few days. But with a rate rise now imminent in Australia, the Aussie held up at US$0.9033. Gold rallied US$3.50 to US$762.80.
There was little doubt about the oil price nevertheless. While belief in a solution in Kurdish Iraq that will not involve a Turkish incursion gains momentum, the latest US inventory release shocked to the downside, and pushed geopolitics aside as the driving force on the day. Oil shot up US$1.83 to US$87.10/bbl for December delivery.
Base metals went the other way in London. Aluminium fell 1%, copper 2%, lead 3%, and nickel, tin and zinc all 2%.
The SPI Overnight took everything as bullish however, rising 32 points.
