FYI | Nov 16 2007
By Greg Peel
It started in Australia yesterday afternoon and continued into Europe and New York. Just when it looked like credit market issues may have seen their worst, and global financial stocks were finding a bottom, investors lost their nerve once more. And it wasn’t any one particular piece of news that sparked another fall. As one US fixed income trader put it, “There’s just this pervasive feeling of doom, I think” (Dow Jones)
A report from the Wells Fargo CEO at the Merrill Lynch banking conference didn’t help. John Stumpf said the housing market is seeing its steepest decline since the Great Depression (which is not even a new story). The bank has boosted its loss provisions in recent quarters to cover increasing defaults on mortgages and home-equity products. Wells Fargo itself was not in trouble however, having steered away from CDOs from the outset.
Mortgage lender NovaStar Financial shares lost 50% as the company, which has now halted subprime lending, posted a huge loss and admitted bankruptcy was possible.
Barclays bank finally came out and announced write-downs of US$2.7 billion, although this figure was less than the market expected. Rumours ran riot however that UBS has another US$8bn to book, and is holding back. The bank denied these rumours, but could not put a figure on write-downs to come.
The US financial sector lost its bottle last night, and returned to weakness after a week of consolidation. The Dow finished down 121 points or 0.9%. The more financial laden S&P fell 1.3%. There was no rush to tech either. The Nasdaq was down 1%.
As a result of this pervasive feeling, carry traders began to unwind again after two days of hiatus. The yen rose against major currencies, affecting a rise in the US dollar against the euro and pound. The Aussie fell around US1c close to close to be at US$0.8858.
There was a renewed flight to quality to US Treasuries. The yield on the ten-year fell solidly from 4.25% to 4.16%. The real irony, however, was that gold fell substantially last night in the face of increased risk aversion. This might be counterintuitive, but it’s all linked to the yen trade (and to overbought positions). A rising yen evokes a higher US dollar against other currencies, but it also indicates a withdrawal from all carry trade positions. One of those is Aussie dollars, but gold is another, as traders have borrowed in yen and invested in ETF products to ride the gold wave. Gold fell US$23 or close to 3% to end at US$788.30/oz. Silver fell over 3%.
It was a bad night for base metal prices, driven by a higher dollar and the news that Chilean copper mines were not affected by the earthquake. Copper fell 3% in London while nickel fell close to 5%. Losses were felt across the spectrum.
Oil was down as much as US$2 last night as news came out that inventories actually rose last week rather than fell as expected. OPEC also announced a downgrade in forecast global demand, if that means anything. But oil rallied back to be only down US66c to close at US$93.43/bbl. Oil just can’t seem to break down through US$90, and that’s part of the overall problem.
The US October CPI came out last night with a headline rise of 0.3% and core of 0.2% – as expected. Oil contributed 1.4% to the headline, which is only the beginning of the catch-up to plus US$90 prices. This has the market worried, as it reduces the chance of another Fed rate cut, despite the credit market woes. The Fed injected US$47bn into the system last night, the highest ever figure since 9/11. Traders were quick to point out that the bulk was simply a rollover from previous injections, and that only about US$7bn was effectively “new”. However, what this means is that despite 0.75% in rate cuts since August, the credit liquidity problem is getting worse, not better.
Jobless claims for the week rose 20,000 to 339,000. This was the highest level of claims for a month. MIT announced its commercial property index dropped 2.5% in the third quarter – the first drop since 2003.
US department store giant JC Penney announced a 9% third quarter loss and slashed its fourth quater guidance noting a substantial weakening in sales in September and October. Its shares fell 5%.
The SPI Overnight fell 64 points.
