Daily Market Reports | Oct 09 2008
By Greg Peel
The Dow closed down 189 points or 2% while the S&P lost only 1.1% and the Nasdaq 0.8%.
It was a rollercoaster to beat all rollercoasters, with Wall Street crossing in and out of positive territory six times. Europe opened in panic once more, sending London’s FTSE down close to 8%. Pre-Wall Street was anticipating a similar and familiar rout when the suddenly central banks of the world united and acted.
It was a much anticipated move, and finally answered the question as to why the RBA made such an uncharacteristic rate cut on Tuesday – there always was going to be a globally coordinated rate cut. Was it timed to occur on the day of the Bank of England’s scheduled meeting, or did the ECB still need some convincing? That will will likely never know. But last night each of the US Federal Reserve, the Bank of England, and the European Central Bank made 50 basis point rate cuts. The Fed dropped to 1.5%, the BoE to 4.5% and the ECB to 3.75%. The central banks of Canada, Switzerland and Sweden also cut their rates.
Importantly, the Fed also made a cut to its discount rate – the rate at which all of these emergency swap facilities for a variety of different securities is based – by 50 basis points to 1.75%.
The move came amidst an unprecedented simultaneous (but not necessarily coordinated) global central bank action to pump billions of liquidity into respective banking systems via various means. Those means include buying equity in all large banks (UK), bailing out specific banks (Belgium), offering to buy distressed securities a la the US (Italy), and guaranteeing bank deposits (all over Europe).
The coordinated rate cut was initially met with enthusiasm and relief by markets, with the FTSE surging all the way back into the green and the freshly open Dow running up 180 points. But the enthusiasm did not last.
The bottom line is that all of these global moves will not prevent a global recession. They will simply provide for protection against complete collapse. And that protection will be neither a silver bullet nor an overnight fix. Recovery in the battered financial system will take time. But economic downturn has only just begun.
The ECB’s Jean-Claude Trichet acknowledged economic weakness as he made his cut, although he still gave a nod to inflation concerns as he pressed the button. US Treasury secretary Hank Paulson also held a press conference towards the end of the Wall Street session in which he, too, warned of the long road of economic weakness ahead. On those notes, the buyers – and there are keen buyers out there – could not hold back the sellers. London closed down 5%, Germany 6% and France 6%. Wall Street lost 2% at the close (but note the broad market S&P only lost 1.1%).
A significant global slowdown is inevitable. The question now is: Is that global slowdown priced in? Stock markets are leading indicators, and over twelve months of weakness and about 40% down is indicative of the fact Wall Street at least has been talking recession since early 2008. As far as the GDP numbers are concerned, it hasn’t happened yet. But GDP numbers are very much lagging indicators. Rate cuts also have a lagged effect – they take a long time to filter through to the real economy (particularly in the US where the standard mortgage is based off the 30-year bond rate, not the overnight cash rate as occurs for some strange reason in Australia).
And it will be the stock market that will turn long before GDP does. We are likely facing at least one, if not two or more years of recession. In that period rates will be cut further and further. Even the ECB has indicated it will do so if it is deemed necessary. As the lower rates go, the more attractive stock yields become. Even if stock prices put in something of a relief rally and then track sideways for months on end, cash will provide safety but a negative real return (inflation will fall, but again, not overnight).
Global coordination and unprecedented amounts of liquidity are needed to unfreeze credit markets. Realistically the stock market is just a sideshow. Last night yields on US Treasuries hit new lows (flight to safety) but then suddenly they turned, and turned hard. Money began to flow back out of safety and back into the real market. It’s only a first step in a Maoist long road, but it was a step that heartened veteran stock market traders. Why the late sell-off in stocks? Because there are still margins being called, redemptions being made, and general recessionary fear. There is still deleveraging going on and it will go on for a long time yet. But the margin calls will stop, the redemption windows will close, and the market will have to look at whether even more downside is justified.
Maybe it is, but maybe the worst is close to over. Global markets have fallen up to 20% in a month. That’s a bear market within a bear market. For anyone who remembers the movie The Towering Inferno from their childhood, recall the final scenes. As the skyscraper burned out of control below them, the remaining victims in the penthouse had exhausted all rescue possibilities. They had one last chance, and in desperation Paul Newman in the penthouse and Steve McQueen on the ground agreed to a plan. They tied Fred Astaire to the furniture and then they blew the top floor water tank. They flooded the building as they held their breath. The flood extinguished the fire.
At the moment the global financial market is being flooded. This is the last hurrah. But we know from various statements that the flood will be maintained as long as it takes. That’s the best we can say.
Global rate cuts are gold’s best friend, and gold shot up another US$21.20 to US$905.40/oz last night.
The Little Aussie Battler lies battered and bruised. In 24 hours it has fallen an extraordinary four cents further to US$0.6674 as panicked carry traders head for the hills. That’s over thirty US cents in a couple of months without even the hint of an MX missile crisis. A word to the wise – recall the disappointment every time an Australian miner announced less than expected quarterly profits because the Aussie was so much higher? Commodity prices have fallen 30-50%. The Aussie dollar’s fallen 30%.
Base metals were yet again trashed. It’s not a dollar thing – understandably when everyone cuts at the same time there are no significant moves in relevant major currencies (Japan sat it out as 0.5% is low enough). It is simply a global recession fear thing, but when you consider copper has fallen 40%, and fell 7.5% last night, it’s again a case of just how low is low enough? Lead fell 3% while nickel, tin and zinc fell 7-9%.
Oil fell US$1.11 to US$88.95/bbl having traded as low as US$86.80 – it’s lowest price since January.
After yesterday’s bloodbath on Bridge Street, which to an extent was a precursor of last night’s action in the Western hemisphere, the SPI Overnight fell only 12 points.
