Daily Market Reports | Jul 08 2008
By Greg Peel
The Dow closed down 56 points or 0.5%. The Nasdaq lost only 0.09%, but the S&P closed down 0.8% to 1252 – right on the previous intraday low and right on the down 20% mark.
The S&P did breach these lows intraday, falling as low as 1240. Wall Street experienced a volatile rollercoaster on its first day back from the break, represented by the Dow being up 111 in the morning, down 168 after lunch, and up 20 with fifteen minutes to go. The VIX volatility index jumped 4% to 26, with still a little way to go to cross 30 and signal (if recent history is any guide) a short term bottom in stocks.
Early strength was provided by the oil price. On Sunday Iran’s foreign minister appeared on CNN and suggested that talks with the West over Iran’s nuclear program had reached a “new environment”. He also stated that Iran would never launch an unprovoked attack on Israel, which seems to be in contrast to his nutter of a president. Either way, the more conciliatory tone was enough to expose the geopolitically speculative element of the current oil price, and oil fell by as much as US$5.79 to US$139.50/bbl in early trade.
Aiding oil’s fall was a rally in the US dollar, but that rally began to peter out. On the flipside of the oil trade was the opinion of the weather bureau that while the current Tropical Storm Bertha would not likely track anywhere near gulf oil installations, it looks like it could be a storm-active summer. At the close of trade oil was down US$3.92 from its close on Thursday to US$141.37/bbl.
The failure of the US dollar rally came as the financial sector once again copped a bombshell. A Lehman Bros analyst suggested that the two government-sponsored mortgage lenders – who provide a great proportion of US home loans – will need to raise tens of billions of new capital to stay afloat. That news sent Fannie Mae down 16% on the day and Freddie Mac down 18%. The entire financial sector was crunched once more, and Lehman itself was down 9%.
Not helping was a comment from the San Francisco Fed president that while financial markets should be functioning markedly better by 2009, things will get worse before they get better.
But when Wall Street looked like sinking into the sunset, in came the buyers. Every market requires buyers and sellers, but the current volatility on Wall Street is exacerbated by strong opinions that, on one side, we are in a protracted bear market and, on the other, that we will never see stocks this cheap again. Either way Wall Street is clearly heavily oversold at present, as the first sign of the cavalry sparked a frenetic turnaround that took all of 45 minutes to reverse the losses. When the dust settled however, the financial and energy sectors remained the hardest hit.
While the dollar ultimately closed mixed – up against the yen and down against the euro – gold followed oil and fell US$8.10 to US$925.90/oz. The Aussie is over 0.6c lower in the 24 hours to US$0.9570. Also notable was a big sell-off in the previously raging corn price. Irrespective of the US dollar connection between corn and oil, a lower oil price will reduce the demand for ethanol and thus the price of corn. Food and energy are inseparable.
The big news in base metal markets over night was aluminium, which leapt 5%. Aluminium is usually the most sedate of all the metals, so while lead, for example, can bounce around 5% a day, a move like that in aluminium is significant. The jump came following an announcement from China’s aluminium producer Chalco that ongoing power shortages would probably force production reductions at two of its smelters. China’s power problems came to the fore early in 2008 when snowstorms all but shut down industry in some parts, sending base metals for a run. The snow melted and power came back on, and the market moved on to other drivers. But analysts at the time warned that the snow only highlighted what was a systemic power problem in the world’s fastest growing economy.
The other metals were also mostly stronger, with lead and zinc up 3% and nickel 2% but copper was left at the gate. The strike situation in Peru has eased.
The SPI Overnight fell 47 points, with banks and energy stocks expected to at least open weaker today. Thereafter, the Battle for Hill 5000 will probably continue.
Tonight in the US sees the “official” start of the US second quarter earnings season, even though quite a few reports have already been forthcoming. Traditionally the season begins with Dow component Alcoa. Overall US stocks are expected to show a year-on-year reduction of 10% in earnings, with financials contributing a 60% drop. This is the expectation, so for the next couple of weeks it will be all about the numbers. If last quarter is any guide, we’re in for more ups and downs ahead than Barry Hall’s football career.
