Daily Market Reports | Nov 07 2008
By Greg Peel
The Dow closed down 443 points last night or 4.8%, while the S&P lost 5.0% and the Nasdaq 4.3%. The close in the Dow was about 60 points off the lows, but the market slid to 400 points down by 2pm and just fluctuated thereafter.
It was another ugly day on Wall Street as Wednesday night’s selling, following several days of rally, fed into more selling last night. Once again volume was light, meaning a vacuum still remains to promote ongoing levels of volatility. It is unsurprising that the “real” money is staying right away for the time being given the markets continue to fly around on light volume and self-feeding sentiment. “Rolling thunder” was again in play last night as Europe began the session catching up to Wall Street’s Wednesday weakness.
There was much anticipation in Europe as it was rate day. The Bank of England, European Central Bank and Swiss National Bank were all due to make monetary policy decisions. In Britain the market had a 50 point cut baked in, with some anticipation that 75 might also be possible. Perhaps the BoE would take a leaf from the RBA. The ECB was also expected to cut by at least 50, while no one was expecting much out of Switzerland.
The BoE then announced a rate cut of 150 basis points, taking its cash rate to 3% – the lowest level since 1955. The market was flabbergasted. The simple principal is that lower interest rates make stocks more attractive, given dividend yields begin to provide better returns than fixed interest investments. On that basis, a cut of 150 points should have sparked a decent rally. But there is a flipside to the argument, being that a rate cut of such magnitude as the BoE just delivered means things are actually a lot worse than the market had thought. Indeed, BoE governor Mervyn King justified the cut by noting “a very marked deterioration in the outlook for economic activity at home and abroad” since the previous monetary policy meeting.
They sold stocks in London. All eyes were then on the ECB. The ECB’s response to the credit crisis since last year has been to initially raise from 4.00% to 4.25%, given the ECB is not charged with supporting the European economy, only protecting the euro from inflation. As the inflation risk has subsided, the ECB has since cut twice to 3.75%. In the meantime however, the Fed has cut from 5.25% to 1.00%. The ECB has come under heavy criticism for not joining in the global emergency easing push.
The ECB duly cut by 50 to 3.25% as expected, but now that looked paltry against the BoE move. So they sold stocks in Europe. The Swiss chimed in with an unexpected 50 point cut as well, and it all looked very depressing. London’s FTSE closed the day down 5.7% while Germany’s Dax lost 6.8%. As Europe closed, the Dow fell to its lows for the day.
And Wall Street had its own depressing news to deal with. Same store retail sales numbers for October were awful, and worse than expected. Cisco put out a poor third quarter result and even more dour guidance. While new weekly jobless claims actually fell slightly, the ongoing number of unemployment benefit claimants rose to a 25-year high. The official employment numbers for October will be released tonight. General Motors is pleading with the new US administration to save it, and speculation suggests GM is every day losing money much faster than anyone had realised.
If there is any pattern here, it is that all economic data released recently have been “worse than expected”. So is the US economy in even worse shape than the stock market believes it to be, or have economists simply been kidding themselves? I’ll let that one hang.
The US stock markets are down close to 40% in anticipation that the US economy would be hard hit by the credit crisis, and now that the supporting evidence comes out, it is sold down again. It is not sold down by the “real” money, just the emotion players and redemption sellers still left on the field. It’s all part of bear market sentiment, and at the moment the market is in a “negative feedback loop”. Tight credit markets have forced a weak stock market which then makes capital scarce and credit conditions tighter, which implies a weak economy, and when the economy does prove to be weak the stock market is sold down and we all go round again. More bottoms than a Queen song.
The same forces are at play in the commodities markets. Again – volumes are light. The real players are staying out of it. The oil price has fallen from US$147/bbl to near US$60/bbl on deleveraging and anticipation of global economic slowing, and when evidence of that slowing emerges, they sell it again. Once upon a time the Dow went down when oil went up, and up when oil went down. Now oil just follows the stock market, assuming it to be the indicator of economic activity and thus energy demand.
It didn’t help last night that the BoE rate cut was bigger than expected, because after a couple of days of rally the forex markets sold the pound and sold the euro and sold the Swissy. Thus the US dollar rose once more, and thus commodities were trashed. Money that had tentatively begun to flow out of the yen again flowed back in.
Oil fell US$4.53 to US$60.77/bbl last night. Gold fell US$6.40 to US$732.70/oz. Copper, nickel and zinc fell 6% and aluminium 4%. The Aussie Battler lost two cents to US$0.6665.
It is dangerous to stand in the way of this logic – if that’s what it can be called. Bear markets do not trade on cold practicalities. The negativity will continue to feedback until the sentiment is exhausted. The hedge funds will continue to sell as their redemptions mount up into mid-November, and beyond if they still need to raise cash. But the rubber band is stretching again, and it will snap back once more as surely as night follows day. As to exactly when, and by how much this time, is not an easy prediction to make in a volume vacuum.
The SPI Overnight lost 180 points or 4.3%.
