Daily Market Reports | Jul 29 2008
By Greg Peel
The Dow closed down 239 points or 2.1% while the S&P lost 1.9% and the Nasdaq 2%. It was not a volatile day – Wall Street opened slower and then slid in an orderly fashion to close on its lows.
The market was led down by the financial sector yet again without anything much to prevent it. There were no economic data releases, and lingering earnings reports were mixed. The US dollar eased with the stock market, allowing oil to close up US$1.47 to US$124.73/bbl, gold up US$1.60 to US$930.00/oz and the Aussie a tick higher to UD$0.9565.
Weakness in the financial sector was more of an ongoing saga than a spontaneous impulse, although there were a couple of factors to dwell on. Firstly, the International Monetary Fund released a report which suggested “at the moment a bottom for the housing market is not visible”. Secondly, federal authorities closed branches of two small regional banks – the First National Bank of Nevada and the First Heritage Bank in Arizona. These are two of the hardest hit states on the housing front.
The slide was not prevented by news that the Fannie & Freddie rescue package had passed smoothly through the Senate, or that the US Treasury and the four largest US banks had agreed to launch a European-style covered bond market as an alternative way to provide mortgages. In a covered bond market banks borrow funds to lend to homeowners and then hold those mortgages on their books. The interest payments on the mortgages are used to repay the initial lenders.
Brilliant! I think they call it “banking”.
What a covered bond market does not provide for is the packaging up of mortgages into technically complex derivatives to be on-sold to investors using enormous levels of leverage, which have the potential to trigger an exponential cascade of devaluation should a handful of the less than prime mortgages in the package default if, for any reason, house prices fall. The latter would affect a freezing up of lending capacity, and would be called a “credit crunch”.
And it is the credit crunch that continues to derail the financial sector. Among the commercial banks, JP Morgan was down 5% last night and Citigroup 7%. Among the investment banks Lehman was down 10% and Merrill Lynch 12%. Merrills is the first of the major financials to post a new low since the last low prior to the F/F rescue bounce. Fannie and Freddie themselves fell 11% and 7% while Dow component general insurer AIG lost another 12%.
It was back to reality for the auto sector as well. Shares in General Motors fell 8% as the world’s biggest seller of cars – Toyota – announced its year-end sales would fall short of targets.
Over in London, base metals put in a choppy day but posted gains as some renewed buying interest from funds triggered short covering. Aluminium jumped 1.5%, nickel 2%, zinc 4% and lead 5%. These numbers will provide some relief for the Australian market today as weakness in the banks is likely to remain the most influential factor.
The SPI Overnight fell 99 points.
