Daily Market Reports | Jan 31 2008
By Greg Peel
At 2.15pm NY time last night the Fed cut the cash rate by another 50 basis points, bringing the total cut in a bit over a week to 125 points and the total cut since the credit crunch began to 225 points. The cash rate is now 3%. The discount rate – the rate at which banks can borrow money directly from the Fed – was also cut by 50 basis points, taking it to 3.5%. The Fed has not made such substantial cuts in such a short space of time since the nineties. Even Greenspan’s post 9/11 cuts were gradual, albeit consistent.
Given this was exactly what the market wanted, and expected, it’s no great surprise the Dow closed down a mere 37 points , or 0.3%. The S&P lost 0.5% and the Nasdaq 0.4%. However, it wasn’t as simple as that. The session began cautiously with the Dow banging around down 75 points. On the 50 point announcement, it shot up 275 points to be up 200 at about 3pm. It then faltered, and in the last half hour fell back into the hole to close down 37. Bears selling into the relief rally?
The question might be asked: Does Australia really care? The Dow rallied 100 points on Tuesday and we lost 1.7% yesterday. The Dow rallied 175 points on Monday and we lost over 2% on Tuesday. In each case Australia was looking north, not east. Asia was particularly weak on our holiday Monday, and yesterday we saw Hong Kong down 2.6%, Shanghai down 1%, India down 1.8% and Japan down 1%. Not even a big jump in base metal prices could save us yesterday, as while the materials index rallied 1% the market was led down by financials, consumer staples and telcos, all down 3%. These are three big calls from strategists as “defensive” stocks (at least the big banks within the financials). Buy Westpac they say, buy Woolies, buy Telstra. Well no thanks. Does this mean the bears are selling into the relief rally here as well? Better performers first?
But back to the US. Early weakness on Wall Street had a lot to do with the fourth quarter GDP number. This was going to be a pointer as to whether the US was likely to slip into recession (or if it already has). The third quarter number was 4.9%. The market expected a much more sombre 1.2% for the fourth. What they got was 0.6%.
This was the worst quarter since the 2002 recession, and the total 2007 growth figure came in at only 2.2%. The biggest negative contributor over 2007 was a 16.9% cut in spending by builders on housing, which basically tells the tale. All important consumer spending fell to 2% growth in the fourth quarter, down from 2.8% in the third. The consumer spending figure for 2007 was 2.9% – the smallest increase since 2003 when the US was trying to pull out of recession and Greenspan was in cutting mode.
Nevertheless, commentators point out that this is rear window stuff, and what is happening now is all that matters. But one assumes what is happening now is not actually better. It all depends on the monetary and fiscal stimulation policies (Fed rate cuts, US$145bn tax relief) from here on, and their elements of success.
Another point of concern in the US last night was once again with regard to the bond insurers. The two big ones – Ambac and MBIA – could be downgraded by credit ratings agencies by tonight. Those stocks fell around 15% each last night. The ramifications of a downgrade are that any bonds the companies insure will also by default be downgraded, and hence may have to be divested by restricted investment funds. These include some US$2 trillion of municipal bonds. While the Fed was slashing the short end last night, the 2-year, 10-year and 30-year bond yields all rose, affecting a steepening of the curve.
The response from the US dollar was predictable, but still sharp given 50 points were expected. The dollar has now fallen back to once again test 40-year lows on its index. Next Thursday night both the ECB and BoE make rate decisions, and of the two only the Bank of England has made any cut so far. If the ECB capitulates, the US dollar will hold up. The Aussie shot up US0.7c to US$0.8966 with the cut, and gold added US$6.70 to US$929.60/oz.
Oil jumped US69c to US$92.33/bbl, spurred by both the cut as a recession saver and the fall in the US dollar. Base metals markets were quiet, with London traders having retired to the pub to watch the Fed decision. It will be their turn tonight.
The SPI Overnight lost 12 points. What will Australia do today? Look to the north, one assumes. What is more important to Asia? The 50 point cut or a 0.6% GDP number?
Attention in the US now turns to the January jobs numbers, due on Friday. Last night the privately calculated ADB numbers came in at a surprisingly positive +130,000 in the private sector, suggesting the January official figure may not be as ugly as the December figure. Many dismiss the ADB numbers as too divergent, however it has been noted that the ADB tends to more closely match the official numbers after the official numbers have been revised twice. This won’t matter on Friday – a bad number could wipe out any joy from the Fed, and turn attention to just when the next cut might be. The Fed does not officially meet again for two months now.
In aftermarket trade in New York e-retail leader Amazon posted a doubling of its profit from the third quarter to the fourth (Christmas). EPS of US48c beat the Street at US47c. First quarter guidance also beat Street estimations. Amazon is down 4% in late trade. Not encouraging.
