FYI | Dec 14 2007
By Greg Peel
Last night’s session on Wall Street started out with a weak tone, as the world continued to muse over the global central bank rescue package and whether or not it was a good thing or too much a sign of bad things. New York would have been keeping an eye on London and Europe which were clearly indicating what the view was over the pond. London’s FTSE 100 fell 3% while Germany’s DAX fell 2%.
Leading UK bank HSBC fell 2.6% while Switzerland’s UBS fell 3.6%. British and European lender HBOS fell 8.2% after announcing write-downs and everyone’s favourite Northern Rock fell 13.3% as potential rescuer Oliphant threatened to pull its bid.
The story had been little better in Japan yesterday, as it was revealed three of the country’s biggest banks were being asked to chip in for Bush’s subprime rescue plan. Subsequently Mizohu fell 5%, Mitsubishi 8% and Sumitomo 7%. The Nikkei fell 2.5%.
An obvious effect of the Bush rescue plan is that for subprime borrowers to have their resets frozen, there must be an offsetting loss (or at least provision) somewhere else in the system. As far as the Fed auction plan is concerned, the world is just not seeing it as anything more than an indicator of inherent problems in the system.
The Dow was down 120 points around 11am before the release of economic data started putting the cat among the pigeons. Ultimately the Dow closed up 44 points, or 0.3%, while the S&P managed only 0.1% and the Nasdaq fell 0.1%.
First cab off the rank was the November producer price index (PPI) – the indicator of wholesale inflation. At the core level (ex food & energy) the PPI rose a modest 0.4% but at the headline level it rose an astonishing 3.2%. That’s the biggest monthly increase in 34 years. The figure was a lot more than what the Street was expecting and was put down to one prevailing factor – the rise in gasoline prices.
This number starts to make the Fed’s continual bleating about inflation look not so misguided after all. And to top it off, despite growing expectations of either a recession or near-recession the oil price is really not much lower in December. What it also means is that the Fed’s timid 25 point cut may yet be justified in its magnitude, and perhaps it will be difficult for the Fed to cut further.
But then the November retail sales figure was released. At an increase of 1.2% this was the best number in six months. It blitzed to paltry 0.2% rise in October and doubled Street expectations. Who said recession? It might be a jolly Christmas after all.
But drilling down into the number revealed good news and bad news. The good news was that about half the number was attributable to sales across a broad spectrum of goods. The bad news was the other half was entirely attributable to the aforementioned rise in gasoline prices. Yes – gasoline sales are part of retail sales. If you want to go further, the US experienced a solid start to Christmas shopping over the Thanksgiving weekend in November but early December has witnessed a noticeable drop off.
There was good news in M&A however, with the announcement that Germany’s Lufthansa had acquired 19% of US domestic airline JetBlue. If it’s not the new enemy buying up America, it’s the old one.
All up it was another weak day for financials while oil stocks helped to push up the Dow. This came despite a drop in the price of oil, which fell US$2.14 to US$92.25/bbl after Wednesday’s big surge.
If the Dow was indicating that strong retail sales were a positive then the Treasury markets took that on board, as well as the PPI’s indication that rate cuts are not a given. The US dollar was strong overnight against all currencies, in yet another bounce that indicates just how short the world is in dollars. The Aussie fell around US0.7c to US$0.8760. US bonds were again sold off as yields spent another day rising around 10 basis points. Libor, however, is remaining pretty stubborn.
And so it was another big move last night for gold, reversing all that happened on Wednesday, which in turn reversed Tuesday, which in turn… Anyway, gold was down US$15.70 to US$797.30/oz.
Base metals were weak in London after the official close, aided by a stronger dollar and weaker gold and oil. Copper and nickel fell around 2.5% while zinc was down 3.5% and lead 4.5%. Aluminium lost 1.6%.
The SPI Overnight, continuing to feel confused, fell 2 points.
