Daily Market Reports | Jan 25 2008
By Greg Peel
Let’s start with the rest of the world. After the big bounce in US stocks on Tuesday, stocks in Asia took off to the moon, with Australia posting a strong but slightly more muted response. As Wall Street put on another bounce yesterday, it was time for Asia to take a breather, with the exception of Australia which seemed to have decided yesterday was a good day to buy. Thus Australia was up 3% while Japan was up 2%, Shanghai was as good as “unch” and Hong Kong and India fell 2%. Hong Kong had put on 10% on Wednesday.
On Wednesday night in Europe, stocks closed weakly as the session ended with the Dow on its lows, prior to the 600 point turnaround. Thus Europe needed to catch up last night and we saw London up 5% and Germany and France up 6%. The bounce in Europe came despite the announcement last night from French banking giant Societe Generale that a “rogue” trader had managed to lose US$7.2bn in stock index futures trading without the bank having any clue. Looks like SocGen learnt nothing from one Nick Leeson of Barings Bank fame (who only lost US$1.4bn) and the only just conclusion would be to see the head of SocGen’s risk management division on a spike at the entry to a bridge over the Seine. But more on that later today.
The rally in Europe also came despite more stoic invective from ECB officials which once again cemented the probability that an ECB rate cut is unlikely.
It was a very volatile day on Wall Street, albeit within a range of only 158 points compared to yesterday’s 632. The Dow tried to rally and failed again on no less than five occasions over the session, before making one final assault to close up 108 points, or 0.9%. The S&P added 1% but the more volatile Nasdaq added 2% as buyers continued to find their way back into shaved techs. Compared to Wednesday, the volume was light. This set the bears growling, as lack of conviction is a signal that a bull recovery is by no means certain.
There were some positive fillips early on, being news that while house prices fell yet another 2.2% in December inventories actually fell. Also falling slightly for the fourth week in a row were weekly jobless claims, but wise heads ignore these numbers as they are extremely volatile. The December jobs number comes out next Friday, and even then wise heads view those official figures with scepticism. But Wall Street will take anything it can get at the moment.
On the negative side, there has been a critical reaction to flagged attempts by regulators to save US monoline insurers from bankruptcy. Just before Big Brother stepped in, critics note, there was private sector interest in buying out stricken insurers such as Ambac and MBIA at their bargain basement levels. Not anymore. One regulator representative appeared on CNBC this morning only to have strips torn off him for being a typical politician – all fluff and no substance.
The big story of the day, however, is still related to the collective Big Brother rescue packages. Congress has agreed to go with the Bush Administration’s US$150bn tax rebate plan, and as soon as the bill is passed Americans can apply within 60 days for between US$600-1200 of one-off relief, or more if you have kids. Woohoo! Let’s get that plasma after all.
More importantly, however, was the decision to raise the upside limit on “conforming” mortgage loans from US$417,000 to as much as US$730,000. To understand why this is important you have to understand the strange US mortgage set-up.
Most mortgages in the US are fixed off the 30-year bond rate and not off the cash rate as they are in Australia. This part actually makes perfect sense, as most mortgages are of a 30-year duration. But it also explains why American mortgagees have received no benefit from the wealth of Fed rate cuts. There has been no equivalent move at the long end of the curve.
Before last night, if you were after a mortgage of US$417,000 or less you were eligible to apply to the government-sponsored lenders Fannie Mae or Freddie Mac. At last count, under US$417,000 you could thus get a 30-year fixed loan for 5.625%. Pass the threshold, however, and you jump straight to 6.625% and need to deal with a private lender. With the bar raised to US$730,000, many more Americans will be eligible for loans a full 1% cheaper than they were previously. What’s more, if you have a 6.625% loan which you’re struggling to pay and you now qualify, you can refinance your loan at the lower rate. This is a much bigger Woohoo! than a US$600 hand-out.
But it doesn’t do much for the poor old US dollar. On this news, and more stoicism from the ECB, the dollar collapsed to its lowest level of 2008. At the same time the market decided it was less likely the Fed would back this particular set of initiatives up with another big rate cut next week. Thus the Fed futures market moved last night from suggesting a 65% chance of another 75 point cut to suggesting only a 65% chance of a 50 point cut.
The initiatives have also had a significant impact on short-end bonds these last two nights. Traders have dumped the “safe haven” bonds and forced yields up from 3.29% to 3.65%. With Bernanke supposedly keeping close watch on inflation, bond yields are reflecting what the Fed futures traders are thinking.
With the US dollar collapsing the Aussie shot up again from US$0.8739 to US$0.8815 in the 24 hours, while gold took off again and added US$23.50 to US$912.10/oz. As is always the case, selling in gold ended abruptly as soon as the panic selling in stocks abated. And the inflationary stimulus packages are a gold bull’s dream. Silver added another US35c to US$16.38/oz.
Oil also shot up, buoyed by a weaker dollar but heartened that all these rescue packages might actually stave off a recession. The irony is that the most likely factor to stave off recession is a lower oil price, but then markets are not socialists. March crude rose US$2.42 to US$89.41/bbl.
Base metals in London returned to strength, encouraged by the big stock market bounce in Europe and a weaker dollar. Gains were posted of between 1-3%.
After two solid days on the local bourse the SPI Overnight still managed to add a further 76 points, adding fuel to expectation that this relieve rally may yet have further upside. While the Dow managed to add a tenuous 100 points, the next point of concern is exactly what the Fed will do next week, following its 75 point emergency cut and all these fiscal stimuli. If the market doesn’t get at least another 50 points then look out.
