FYI | Nov 22 2007
By Greg Peel
A weak day on the Australian bourse saw the ASX 200 close at 6384 yesterday, which is 713 points or 11% from its August low. Remembering that the Australian market corrected by 15% to August, the Dow last night crashed through its previous 10% correction mark at 12,845 and closed on its low at 12,799, down 211 points or 1.6%.
The S&P 500 fell 23 points or 1.6% to 1416, which is just 10 points or 0.7% from its August low. The Nasdaq, which had shot to substantially higher highs after August (although still a long way from the tech boom peak in 2000) fell 34 points or 1.3% to 2562 – still 111 points or 4.3% from the August low.
The close below 2845 represented a third attempt at breaching the level. It was briefly breached on Tuesday and again in early trade last night, when it fell to 12,820 before recovering. A close below the August low is a significant event for those technical traders who subscribe to Dow Theory – a 100 year old fundamental wave theory developed by Mr Dow himself and popular with technical Elliot Wave theorists who see the predictive patterns as closely related. The most famous Dow theorist of recent times is Bob Prechter who called the 1987 crash. Unfortunately for Prechter, he’s never been right since.
But enough about the tea leaves. Wall Street opened weak from the bell as mortgage and consumer concerns continued to weigh. Buyers returned strongly to the yen once more, selling pounds, euro and Aussie amongst others in carry trade unwinding. This was reflected in late local trading in Australia. If you want a leading indicator of which way the market will turn – watch the yen. The Aussie dropped over US2c from yesterday to be US$0.8707 this morning.
The barometer for last night’s action initially was Dow component General Motors. GM has been suffering due to its 49% stake in its finance arm GMAC, which in turn has a mortgage division Residential Capital. ResCap has been facing the possibility of not being able to roll over its loan book, and its debt had been trading at levels that suggested bankruptcy. However, mid session GMAC announced it would look to sell parts of ResCap, but would also look to buy an offshore mortgage business to complement ResCap and, most importantly, announced it would buy US$750m of ResCap debt at 10bps over the current level.
This announcement changed the mood on Wall Street, as GM’s show of faith in distressed mortgage debt sparked a rally across the board and particularly amongst the troubled mortgage lenders. The Dow made a couple attempts at a substantial fight back. But in the end, on a trading floor thinned out as traders made their way to airports, the pre-holiday sell orders flooded in and the Dow completely lost it, falling 150 points in the last half hour. The stock market will be closed tonight in the US, and Friday will be a half-day session manned by those juniors who drew the short straw.
With the yen carry trade unwinding, the accompanying trade is a flight to safety into US Treasuries. Big moves last night saw the two-year sitting just on 3% and the ten-year just on 4%. The buying of Treasuries supports the US dollar, which managed to be slightly positive last night. But traders are more and more starting to believe the Fed will have to make further rate cuts to head off recession and save the credit markets. Following this week’s notable downgrade by Goldman Sachs of Citigroup shares to Sell, Goldmans followed last night with a similar downgrade to Swiss banking giant Credit Suisse.
The November consumer sentiment index came out last night and was actually not as bad as expected. It registered 76.1 against expectations of 75. However, this is still a sharp fall from October’s 80.9 and a long way from November 2006’s 92.1. The weekly jobless claims came in at 330,000 which was on the money, but the leading economic indicators index dropped 0.5% against expectations of a 0.3% fall.
Gold was caught on the horns once again. World financial markets look bleak which should mean gold enjoys a flight to safety as well but the US dollar was steady and the carry trade was unwinding, which is a negative for gold at least in the short term as many an investor has borrowed in yen to fund gold purchases (and gold pays no dividend). Ultimately gold was down US$4.40 to be smack on US$800.00/oz.
Oil was meant to be another big story last night. Given it had traded over US$99 in the overnight market, news crews crammed the Nymex to capture oil’s first close above US$100/bbl. Murphy could have told you it was thus never going to happen, and it was announced that while net inventories fell as predicted inventories in storage at Cushing, Oklahoma, actually rose. This is the delivery point for Nymex WTI futures and as such was a bearish signal. Oil fell US74c to US$97.29/bbl and all the news crews packed up their cameras and headed off feeling like Thanksgiving turkeys.
Base metals were ugly in London. This time it was the turn of zinc to find all speculative confidence lost as mounting US recession fears coincide with rising inventories. Zinc continued to fall on the LME after official settlement, losing 6% and closing under US$1.00/lb, representing 20-month lows. Like copper before it, technical stop-loss triggers were blamed for the big slide, and all of this ties back in to the carry trade unwinding story. Hedge fund speculators have borrowed in yen to buy commodity investment instruments. Copper was also down as much as 4.5% again and lead – the most volatile of (traded) metals – fell another 6%.
While the fundamentals look negative for metals – slowing global economy and rising inventories – metal price pullbacks will come as no surprise to a lot of resource analysts who have been predicting exactly that. But the down-shifts have been severe as the bailing speculators have scrambled over the top of the “real” metal traders. This will no doubt lead to overselling at some point, but we may need to see a lot of distressed investors clear out yet.
In a move that smacks of “underdone”, the SPI Overnight fell 30 points. This is probably because the Australian market fell yesterday despite a supposed Dow rally (although that rally was really a lot of thin air).
To our American readers – Happy Thanksgiving. To all, there will be no Overnight Report tomorrow morning as markets in the US are closed.
