Daily Market Reports | Feb 29 2008
By Greg Peel
In his second and final day of testimony to the House Finance Committee, Fed chairman Ben Bernanke managed to keep the headlines coming as he suggested there would indeed be bank failures in the US stemming from the credit crunch. The big banks would survive, he suggested, although they have capital issues which need to be resolved. However, some smaller and medium regional banks would not survive, Bernanke grimly warned, and the Fed will stand ready to assist in consolidating these institutions into more secure larger banks.
This was enough to once again put a dampener on the financial sector, as the Dow slid to post a 112 point, or 0.9%, loss. The S&P and Nasdaq were also each down 0.9%.
Not helping the mood was the release of the preliminary fourth quarter GDP estimation, which came in at only 0.6% growth to the Street’s expected 0.8%. Third quarter growth had been 4.9%. If the numbers needed any anecdotal support, retailing giant Sears reported its fourth quarter profits were half of what they were for the fourth quarter 2006.
If the fourth quarter estimation is close to the mark (and it will be revised at least twice yet), then small but positive growth means both the second and third quarters in the US will need to turn negative in order to define a technical recession. That means we won’t know if the US has actually hit recession until about November. Not that technical definitions are of any meaningful use right now.
The Dow was nevertheless boosted by strong performances by Exxon and Chevron, as oil once again surged to a new high. Following yet more militant activity in Nigeria, oil rose US$2.95 or 3% to a new nominal high of US$102.59/bbl. This number is also in the region of a new all-time real dollar high, but economists disagree on which of the multitude of inflation measures should be used to arrive at this figure. Is it important? Not if you need to buy heating oil, for that is definitely at an all-time. high.
Oil’s rise was also assisted by the US dollar, which is toast. Expectations of a March rate cut of 50 points now exceed 100% as measured by Fed funds futures, and many are suggesting a cut will come before the official March 18 meeting. Rising inflation is curbing expectations of a rate cut in Europe, so the result is a euro which has now run ahead to US$1.5215. The dollar has also fallen to 105.3 yen, but despite yen buying the falling dollar has pushed the Aussie into new multi-decade territory at US$0.9488.
Which means gold must go up, and go up it did – another US$12.10 to US$970.10/oz. Silver has also continued its surge towards all-time highs, adding another 3% to US$19.81/oz.
On Wednesday in London it was zinc’s turn to star, but last night zinc only managed to add another 4% as nickel surged past with a 6% rise, driven by news of a strike at BHP’s Columbia nickel mine. Tin, meanwhile, added another 5% in its continued push into blue sky, while aluminium, copper and lead were all less spectacularly stronger.
Despite what looks for all the world like screaming stagflation, at least in the US, Bernanke did maintain his line that he thought the stagflationary environment was a temporary one, and that inflation would soon fall ahead of the US economy turning around. There appears to be little comfort in these words at present.
The SPI Overnight was down 42 points.
