FYI | Dec 19 2007
By Greg Peel
The Fed’s auction of US$20bn of 28-day credit occurred on Monday, but the volume and price of the uptake from the market will not be known until tonight. The announcement of this auction last week, as part of a coordinated global central bank effort to restart credit markets, has ultimately not had an inspiring effect on the stock market. From the opening bell last night, the Dow was sold down again to be 75 points in the red at lunch.
Then came the announcement that the European Central Bank was offering US$500bn in 16-day credit at 4.25% – 25 basis points over ECB cash but more than 75 points below Libor. Suddenly there was the sort of break in credit markets central banks had been hoping for, as the 90-day Libor rate (the rate at which global banks lend to each other) collapsed by 50 points. The Bank of England was also in on the act, offering US$10bn of 90-day credit at 5.36% – 14 basis points below the UK cash rate.
The Dow took off on the news, rallying to be up over 100 points for the session before drifting back once more. The index ended the day up 65 points, or 0.5%. The S&P added 0.6% and the Nasdaq 0.8%.
This was an extraordinary move by the ECB – a blitzkrieg attack aimed at providing an electric shock to the European credit market which was in danger of being pronounced DOA for Christmas. As to just what effect it will ultimately have remains to be seen. The US dollar managed only to close mixed last night, with the index ending flat. The Aussie scraped back to US$0.8603.
Gold rallied US$10.90 to US$802.70/oz on the news that yet more liquidity was being pumped into the system.
The world’s largest investment bank – Goldman Sachs – announced its fourth quarter profit result last night. Goldmans was the only major bank to announce a profit in the third quarter, having not only avoided the subprime CDO fiasco but actually having been short credit securities. The bank again announced a solid profit last night, but added that November had been a very bad month and that 2008 was not looking particularly hot as credit market problems deepened. Traders ultimately sold the stock down on the news.
On the economic data front, it was revealed that US housing starts for October fell 3.7% to their lowest level in 16 years, while building permits fell 1.5% to their lowest level in 14 years.
It was a volatile night’s trade in oil, as first it was announced that Turkish troops had advanced into Kurdish territory in northern Iraq, and then later it was announced they’d withdrawn again. Oil ultimately finished down US16c to US$90.49/bbl to mark the close of the January contract.
By the end of the day, base metals in London managed to close slightly higher, but not convincingly so.
The SPI Overnight gained 18 points.
In a case of shutting the gate after the horse, the Fed last night announced moves to crack down on shonky lending practices.
