FYI | Jan 23 2008
By Greg Peel
Americans enjoying a long weekend were clearly shocked to see the carnage across global stock markets from Europe and into Asia. Yesterday’s Asian session, following on from significant weakness on Monday, saw Australia down 7%, Japan 6%, Hong Kong 9%, China 7% and India 5%. In a case of weakness begetting weakness, Europe again opened weak last night. Hours before the opening bell in New York, the Dow futures were indicating a fall of 640 points.
This was too much for the Fed. There had been speculation that an emergency rate cut might be on the cards ahead of the scheduled meeting next week. Wise heads suggested this would only occur in the case of significant panic. And they got it. The Fed moved to cut the cash rate and discount rate each by 75 basis points, to bring the cash rate down to 3.5%.
On the opening bell, the Dow printed down 464 points. But that was the bottom. Therein followed an aggressive short-covering rally which saw the market race back 300 points in the space of an hour. After spending the rest of the day fluctuating, the Dow finished down 128, but not before coming within about 40 points of the unchanged line. To the bulls, this was a day they’d like to call the bottom. For the bears, the failure to break into the green signalled no more than the sort of short-covering rally which follows every major down move. Although Wall Street may yet push higher this week, the bears are still suggesting a sell into any rally.
For Australia, this Wall Street bounce will set a more positive tone this morning, with the SPI Overnight indicating an opening up 190 points. Yesterday’s 7% fall was a classic case of the biggest move is often the last one in a succession of down days. The final, panic-driven, shake-out collapse. Margin calls driving selling, driving more margin calls, driving more selling. The same question applies for Australia: Did we see the bottom yesterday? Once again, it is not a time for anyone other than professional traders to bet on that being the case. There is time for more play in this game. If it was the bottom, there is plenty of upside scope ahead for everyone. But bear markets rarely bounce back fast.
In the US, the question is also: Has the Fed saved the day? The two sectors hardest hit to date – financials, as a result of the credit crisis, and retail, as a result of recession fears – were the strongest movers to the upside, finishing well into the green last night. This, however, smacks very much of short covering and not genuine buying. The Fed has come under criticism yet again for being reactive and not proactive. Whatever the rhetoric may suggest, the Fed was looking down into the black hole when it made its decision last night, as far as anyone is concerned. This is what the statement said:
“The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.
“The committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.
“Appreciable downside risks to growth remain. The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.”
The market has taken the last paragraph to suggest the Fed may yet still move again next week at the scheduled meeting, even by as much as another 50 basis points. For many months, economists have been suggesting that 3% would be the Fed’s target. But the Fed had previously cut the cash rate down from 5.25% to 4.25% and yet the credit crisis has only deepened. You can give banks all the cheap funds you want, at the risk of devaluing the US dollar, but you cannot force them to lend to institutions and corporations perceived to be a risk. You can lead a horse to water…
On the final count, the Dow was down 128 or 1%, the S&P was down 1%, but the Nasdaq still fell a more substantial 2%. These numbers are, however, a lot better than what might have been.
The Fed rate cut had its expected effect on the US dollar, sending the currency downward once more but not as far as the lows of November. While this affected a propping up of the Aussie after a big slide in yesterday’s trade (the Aussie is US0.8c higher over 24 hours to US$0.8699), the most significant effect was on gold, which turned around to rally US$23.80 to US$889.80/oz. Silver bounced US46c to US$16.05/oz.
London officially marked base metal prices lower before the afternoon session followed a rallying Wall Street and a falling US dollar to push prices higher for the close. Price moves were best reflected in the New York session where lead and copper put on 3% and aluminium and zinc 1.5%. Oil did not share in the spoils, slipping slightly to close out the February contract at US$89.85/bbl.
European stock markets had attempted to go again into the red last night on anticipation of a crashing Dow, but huge bounces were experienced. London finished up 3% on the day while Germany managed only to return to almost unchanged. Had Wall Street fallen on the back of the rest of world’s moves, and then Europe gone again, and then Asia gone again, it would have been the case of an endless and illogical spiral feeding off itself. As it is, Asia should experience some very solid bounces in today’s trade. If the Fed has achieved anything, it’s a “time out”. A chance to rest on the bench and reflect on what the next strategy should be.
