FYI | Nov 13 2007
By Greg Peel
Credit crunch fallout continued to dominate Wall Street last night on what should otherwise have been a quiet Veteran’s Day when bond markets are closed. The biggest hit for the day was taken by online stock executor E*trade. While the company has enjoyed elevated trading volumes its problems lie in its finance division, which has declared holdings of a US$3bn portfolio of mortgage assets.
But it was a report from Citigroup analysts that put the cat among the pigeons, the broker downgrading E*trade to Sell and suggesting its write-downs could total as much as US$5bn, hence implying the potential for bankruptcy. E*trade shares traded down almost 60% while management came out to reprimand Citi for its “irresponsible” actions.
Elsewhere mortgage lender Countrywide was back in the frame once more, the company suggesting if its bonds are downgraded to junk it may have to turn to banks for finance in order to keep going. Predictions are now also being made for write-downs at HSBC, with US$1bn the current tip.
As traders prepare for this week’s round of retailer earnings reports with due concern, one example of indirect subprime fallout came in the form of satellite television provider EchoStar, whose shares lost 17% as it announced a groundswell of consumers abandoning the luxury of a few hundred channels in order to pay the mortgage.
All this is adding up to credit crunch phase II, although realistically it’s just phase I that never ended. Wall Street was far too quick to dismiss the ongoing problems subprime mortgages would cause and not patient enough to await the true economic picture that would play out. Recession fears continue to heighten.
All this means global financial markets are once again losing faith in risk, and this is being manifested in the form of an unwinding of the yen carry trade. Forex markets dumped euros and pounds against the yen last night, sending the US dollar bouncing hard against those currencies. This creates a double-whammy effect on those investments which have benefited from a lower yen and a lower US dollar to date. The Aussie is now trading under US88c which represents a full US3c fall from Friday’s close in New York.
But it was gold that copped the full brunt. Having run up almost unchecked from US$700/oz to nearly US$850/oz (the all time high), gold lost US$29.20 or 3.5% to close at US$802.90/oz last night. Recent star performer silver faired worse, losing US90c or almost 6% to US$14.58/oz.
Gold investment through vehicles such as ETFs has been another trade fuelled by the carry trade fires. As the carry trade unwinds and the US dollar bounces, so what was already looking like an overbought commodity suddenly found a vacuum. Another commodity to suffer a similar fate was oil, which fell US$1.70 to US$94.62/bbl but which kept falling to be down at least US$2.50 in the aftermarket. Assisting oil’s drop, apart from anything else, was news that OPEC would consider increasing production. This is all well and good, but there have been questions raised as to whether OPEC even has such a capacity.
Nor were base metals immune, with copper in London adding a further 3.5% to its slide, while zinc lost 3%, aluminium 1.5% and nickel managed to hold up on inventory concerns.
Stocks are also aided by carry trade funding, but there was another trade unwinding in equity markets overnight. The pattern that began late last week continued into Monday as the big tech names were again slammed while troubled financials and retailers hung in there. The most popular trade on Wall Street for the last few months has been buy tech-sell financials, and as traders begin to worry about an economic slowdown affecting IT spend that trade is now being unwound in earnest. Hence there is support coming in for financials – at least for now.
The Dow suffered another one of its last minute drops to be down 55 points or 0.4% at the close. The Nasdaq, however, was down 1.7%. The S&P split the difference and fell 1%. It was a volatile session as the Dow toyed around the 13,000 level, finally slipping below to 12,987. We are now only 141 points or 1% away from the August low close of 12,846. A breach of that level would likely prove ominous.
The SPI Overnight lost 38 points.
Just to put some things in perspective, the fall in the Aussie overnight means both gold and copper posted slight positive moves in Aussie dollar terms, while WTI oil jumped 1.8%.
