Daily Market Reports | Oct 07 2008
By Greg Peel
The Dow closed down 369 points or 3.6% while the S&P closed down 3.9% and the Nasdaq 4.3%. Just before 3pm the Dow was down 800 points for a 7.7% fall, spectacularly breaching the 10,000 mark to see a low of 9,525 – its lowest level since 2004. There began a fierce rally in the final hour to mark less than 300 points down as the bell rang, before the computer caught up with the late rush of trades and down 369 was the result, for an index level of 9,955.
A combination of a weak US jobs number and nervousness surrounding the Treasury rescue plan and its implementation – for which no details have been released – saw the Dow turn a 300 point gain into a 150 point loss on Friday, setting the scene for the rest of the world to also lose confidence. The result was another big sell off in Asia, including a 3.4% fall in Australia in light volume on the Monday partial holiday. But eyes then turned to Europe where the spotlight has now fallen on a dramatic banking crisis set to mirror that of the US to date.
The market has been waiting for the European fallout all year.
Over the weekend the leaders of Germany, France, Italy and the UK (the latter being an EU member but not a member of the EMU and thus not beholden to the euro) met at France’s behest. France is currently the EU chair on rotation. The intention of the meeting was to discuss a coordinated effort to prop up the European banking system in some similar form of bailout enacted in the US. While the leaders were prepared to show solidarity to discuss the matter, they were not prepared to show any solidarity to solve it.
The simple problem is that the 26 EU member economies are a disparate and fractured group, dominated by the larger economies but carrying many basket cases among the total. The largest economy is that of Germany, and unsurprisingly Germany resisted any rescue pool being provided by all members given it would mean Germany handing over a significant amount of its own funds to other members and then having no control over how those funds are used. Germany baulked, and the Big Four thus decided each would look after its own house. Thus began announcements across Europe that bank deposits would be protected in various countries individually.
Germany announced it would guarantee US$786bn of private deposits and also put up US$69bn to bail out the country’s second biggest mortgage lender Hypo Real Estate.
The “every man for himself” attitude did not sit well in European stock markets, which suddenly came to appreciate the gravity of the situation. Hence the German DAX fell 7.1%, the UK FTSE fell 7.9% and the France CAC fell 9.0%. This was enough to send the Dow spiralling to its dramatic lows.
But perhaps the most stark indication of the problem in Europe is the fall in the euro overnight, collapsing to US$1.35. The euro’s fall is now not only reflecting economic weakness in the region, and a clear belief in recession, but the question over the very capacity for the euro to survive as a collective currency.
The euro’s fall translates into a stronger US dollar, and as talk intensifies of rate cuts in Europe and elsewhere (including Australia) there has been a significant unwinding of the US dollar carry trade. In a window of opportunity this year where the Fed funds rate of 2% sat well below the rates of major trading partners both developed and developing, the market has played the opportunity to borrow in US dollars (sell dollars) and buy elsewhere (including Australia). That trade is now being rapidly unwound, and that’s why the US dollar is soaring.
And it’s also why the Aussie has fallen over five full cents from Friday to US$0.7202, at one point falling below US$0.71.
The soaring US dollar provided an extra kick in the guts for commodity prices, which are already falling on general global economic weakness. Last night oil fell US$5.98 to US$87.90/bbl, while base metals were completely trashed in London. Copper fell 7% and nickel 8%, while aluminium, lead and tin fell 3-5%.
Gold went the other way, however, decoupling from the US dollar and simply playing its role as a safe haven against economic disaster and the fragility of paper currencies. Gold rose US$22.10 to US$856.90/oz.
Selling in the US market was across the board from the outset, with an extraordinary number of new lows being posted. The selling was attributed to a rush of redemptions at both the retail level (from mutual fund holders who just got their September statements) and the hedge fund level (a rare window for redemptions is now open in many cases). But there were no buyers.
Volume was light for a day of such magnitude of index movement, leading wise old traders to suggest this was not a day of classic capitulation. Buyers stood aside to allow the redemption trades they knew were coming to drive the market lower, before jumping in at the last hour to wipe 450 points off the fall. Assisting buying decisions late was a rumour that central banks were discussing a coordinated global cutting of interest rates, although this is only a rumour or expectation so far. The old hands would have preferred a close on the lows on large volume before they could declare a bottom.
The VIX volatility index – a proxy for market fear – hit 58 last night which is a record. It fall back to 52 by the close. This indicator has now tested blue sky and thus has lost any power as a bottom-picker, for we know not how high it might go.
The SPI Overnight fell 178 points or 3.9%.
In aftermarket news, Bank of America made a surprise early announcement of its third quarter result – a 68% fall in profit. BA posted an EPS of US15c when the market had pencilled in US62c. BA also announced it was halving its dividend and issuing US$10bn of common stock.
The most important late breaking news is that the Fed may be prepared to move into the unsecured credit market. The US government has now done its bit but The Plan was never going to be an overnight fix. The commercial paper market remains as good as frozen, and commercial paper is what companies in every sector use to fund their day-to-day operations. Without such unsecured short term funding, businesses would have to shut down. To date the Fed has massively increased liquidity in the financial sector by accepting all forms of collateral in exchange for Treasury funding, hoping that the banks would then release funds to each other and the real economy. This is not happening. Thus the Fed may go straight to the source and lend into the commercial paper market without the usual collateral requirements.
Pandemonium reigns. Once again, today may present wonderful long term buying opportunities in the local market but one cannot say with any confidence whether even better opportunities may not arise tomorrow or next week.
