Daily Market Reports | Jun 18 2008
By Greg Peel
The Dow fell 108 points or 0.9% while the S&P and Nasdaq each lost 0.7%.
The market attempted to open higher last night, buoyed on by Goldman Sachs actual second quarter result announcement. Goldman – the world’s largest investment bank – posted a profit of US$2.05bn which, at 11% down on last year’s second quarter, was a better result than analysts had estimated. Of all the investment banks, Goldman has been a stand-out from Day One of the credit crisis given it had not bought heavily into subprime CDOs and had in fact shorted them.
But Goldman has not been immune to the wider implications of the global credit malaise, and has been forced over the past quarters to write-down the value of various credit positions along with everyone else. What it has not had to do, however, is join the mad dash for survival capital. But it was not the numbers in Goldman’s result that ultimately spooked the market, it was what the investment bank said. When Goldman talks, people listen.
Goldman’s accompanying report suggested that credit losses from the mortgage and general lending markets will not peak until 2009, and that on top of the US$120bn in capital raised by US banks to date another US$65bn will be needed.
This proved a dose of reality for the financial sector, a sector for which the bulls have been trying to call a bottom since about the third quarter 07. All banks and brokers fell steadily on the day. Adding to the woes is a growing concern over regional banks and their problems, and this has now been exacerbated by lending that occurs in the corn-growing regions in the usual crop cycle – a cycle now devastated by flooding.
There was no sign of relief on the housing front either, as May housing starts fell by 3.3% and building permits by 1.3%. Wall Street had been becoming somewhat immune to weak housing numbers, considering falling prices more of a lagging effect than a leading one. But indications that US housing is just getting weaker and weaker only add to the general gloom, and provides support to Goldman’s theory that the peak of the problem is yet to come.
Then there’s oil. Despite the potential for a volatile day on the expiry of oil options last night, movements were relatively subdued. Crude closed down US60c to US$134.01/bbl. Traders are now looking ahead to the weekend OPEC meeting, unwilling to take a big position should some significant decision be made in terms of raising or not raising production.
But the oil effect was most apparent in last night’s release of the May producer price index. As was the food effect. Last Friday’s CPI showed an unremarkable increase in the headline CPI of 0.6%, and in the core of 0.2%. But the May headline PPI showed a rise of 1.4%, over and above the 0.9% expected by economists. The core, excluding food and energy, rose only 0.2%.
While food contributed 0.8% to the rise, it was the 4.9% contribution from energy which provided Wall Street with yet another dose of reality. The annualised CPI is running at 4.2% – a number which has Ben Bernanke fretting – while the annualised PPI has hit 7.2%. For yet another month, it is apparent that retailers having been holding back on passing higher wholesale costs on to consumers, and suffering margin squeeze in the hope that the supposed oil and food bubbles will burst, as many have suggested. But as each month goes on, this is simply not happening.
If retailers are forced to crack then the CPI will rise to meet the PPI, and inflation will be not just a problem but a very serious problem. In the meantime, corporate profits across every sector will be under pressure while the oil price refuses to fall. Even if it does fall, they will still be under pressure from what will still be a high price. Every sector uses energy in some form to go about its business. Even the oil companies use energy.
Despite the potential for a Fed rate hike that the higher PPI might suggest (although the core was still a non-event at 0.2%), currency traders looked through to the wider implications of a weakening US economy and again sold the US dollar down. Gold rose US90c to US$883.00/oz. The Aussie climbed further to US$0.9436, having been weaker in the local session following the release of the RBA minutes.
[What was it with those two-week old minutes yesterday? While the board meeting minutes can provide an insight into the RBA’s thinking if nothing had been said since, chairman Glenn Stevens has in the meantime been out warning anyone whose prepared to listen that the bias remains very much to the tightening side while global demand is forcing up global inflation. Indications may be that the Australian economy is slowing, but it is not yet time to dismiss the possibility of another hike. Beware the June quarter CPI.]
Base metals were mixed in London as they continued to play individual games under the influence of a weaker US dollar and a weaker US economy. Aluminium broke to the upside with a 2.5% jump, and lead followed with another 4% rise as it continues to recover from hitting a 15-month low recently (this despite increasing stockpiles). The others were inconsequential.
The SPI Overnight fell 16 points.
The local market yesterday witnessed a big bounce off the 5300 level in the ASX 200 (5310 to be precise) which was heartening, but it seems there is yet more work to be done. Morgan Stanley reports its second quarter result in the US tonight.
