Daily Market Reports | May 07 2010
By Greg Peel
The Dow closed down 347 points or 3.2% while the S&P lost 3.2% to 1128 and the Nasdaq lost 3.4%.
At about 2.45pm last night the Dow was legitimately down around 350 points. Within moments it was down nearly 1000 points. Moments later it was back to being down 350 points again. Wall Street is abuzz and still unsure exactly what went wrong.
Not about the 350 points – that's real. But the sudden plunge has been initially attributed to a “fat finger error” which erroneously caused a couple of big Dow stocks – Proctor & Gamble and 3M, and other smaller stocks only now being recongised – to “print” trades some 20% below the last trade and in some cases down to one penny. A fat finger error occurs when a trader accidentally enters into a computer platform a trade which is materially wrong in price and/or volume. For example, locally someone may have an order to sell 1000 BHP at $38.00 but instead enters a trade to sell 1,000,000 BHP at $3.80, cleaning up every buy order on the way down.
However, the NYSE is not so sure and has another explanation. The NYSE has certain “circuit breakers” in place for times of extreme volatility, one being that normal electronic order placements speeds are reduced from milliseconds to 30 seconds – not a halt but a forced pause – so that the market may cool down. Given that huge volumes are these days executed by computers moving faster than the human eye, it is the computers that have to be fooled into cooling down. But while the NYSE has this mechanism the plethora of sanctioned smaller electronic “exchanges” does not.
The NYSE's interpretation therefore is that when it “paused” trading in certain stocks, electronic exchanges kept trading and computers sold market orders into a sudden vacuum, which also triggered responses in futures markets and so forth. It all happened in a blink, and one can safely assume there will be many trades “removed from the tape” once the truth is known. In other words, the Dow did not drop 1000 points.
But it did drop 350 points and had done so before this problem occurred.
The reason for the 350 point drop was simple – it was more of the same – except one thing is now painfully clear and that is Jean-Claude Trichet, president of the European Central Bank, has to go.
The Greek parliament passed the budget cut bill last night required by the EU to trigger emergency loans. As expected, rioting in the streets of Athens stepped up to another gear although thankfully this time no lives were lost. The global market is simply afraid that even if the rescue bills pass through the respective EU member parliaments, which has not yet occurred, civil unrest in Greece will overcome and the current Greek parliament will be ousted in favour of a party willing to thumb its nose at the eurozone and the EU. There is no mechanism for the eurozone to kick out a member, but there is a mechanism for a member to withdraw.
This sounds like it might be the simplest solution, but it isn't simple. Suddenly Greece would have to reestablish the drachma while all Greek-related euro debt and other instruments would be sent into chaos ensuring European contagion through credit spread blow-outs. That's what was happening last night in anticipation, as once again the credit spreads of Greece, Portugal and Spain went soaring.
The European Central Bank, however, had an opportunity to calm the storm. Having originally said it would never extend emergency credit to one eurozone member and not others, Trichet recently reneged and offered to swap any Greek paper. With the fallout continuing and contagion spreading this week, he had the chance to make good on his original pledge at the scheduled ECB monetary policy meeting last night and open the balance sheet to all eurozone members, effectively extending emergency loans to all states needing them and not just Greece. But do you know what he said in his press conference after the meeting?
“We did not discuss this option”.
This is the most fundamentally ingenuous comment I think I've ever heard from a financial market official. He followed this up by suggesting a default of Greek debt was “out of the question”.
Obviously what Trichet is trying to do is appear so incredibly blasé about the situation that markets would assume there can't really be anything to worry about. It's right up there with the Lehman CEO's comment of “no problem” the day before Lehman went under. Trichet had the perfect opportunity to, if not actually enact emergency loans, or drop the ECB cash rate to zero, explain to the market that every avenue was being pursued and the central bank was confident of resolution etc etc. But no. “We did not discuss this option”. What a fool.
Hold on to your hats, the eurozone is crumbling. This can only get worse before it gets better. Germany must pass its rescue bill and the ECB must wake up to itself.
Despite recent falls in New York, last night was one night in which we can honestly say the European situation has “gone global”. European stock indices did not fall that much (London 1.5%, Germany 0.8%, France 2.2%). It was capitulation in New York in which trading volume on the NYSE exceeded 2bn and the VIX volatility index jumped 32% to 32. It is not the first time, and won't be the last, that a parochial Wall Street shrugs of non-US danger before finally twigging to the possible consequences.
The flight to quality naturally stepped up a gear. Gold jumped US$33.20 to US$1208.80/oz and the US ten-year bond yield plunged 15 basis points to 3.39%. But the flight to quality was this time equally matched by the flight out of risk. It has been a trickle up to now, but last night the world began to bail out of the yen carry trade.
The euro plunged another 1.5% to US$1.2628 as expected but the US dollar index's move up 0.9% to 84.74 seemed almost timid. That's because the dollar-yen fell 3.3% to 90.80, implying a massive reversal of yen shorts against the greenback. The euro-yen, followed by many as the quintessential risk indicator, fell 4%.
Yen carry trading occurs when funds are borrowed in yen (cash rate 0.1%) and invested in a high interest rate currency such as the Aussie (cash rate 4.5%). Last night the Aussie plunged 2% to US$0.8872.
The London metals market reflected the European stock markets, and also closed before everything went awry on Wall Street with fat finger trades etc. After a few days of commodity fund dumping, last night all metals were down by only 1% or less except nickel, which was down 2%.
Oil nevertheless plunged 3.6% or $2.86 to US$77.11/bbl.
Europe has taken the brunt of the selling in all markets this week, and realistically Wall Street is only now beginning to catch up. With stocks like Deutsche Bank down over 20% from their recent peaks one wonders how much more is left at this point.
The SPI Overnight fell 173 points or 3.8%, much further than the S&P 500. The world has been, and is, bailing out of the Australian “risk” trade and bringing money home to safety.
Following an 80% rally from the March 2009 low, and measured complacency this March and into April, there have been many in the market expecting and even hoping for a 10-20% correction as a reality check. If the SPI is accurate the ASX 200 will today close at 4400, down 12% from the 5001 peak.
The good news is that value has returned to Australian stocks, although more value will likely appear yet. Europe needs to and, one presumes will, get its act together. But they're making a complete meal of it so far.
US jobs tonight. For what it's worth, the April same-store sales figures for major US chains were released last night and disappointed, rising only net 0.5% when 1.7% was expected. However commentators were quick to point out the lack of Easter in April this year and the persistent rain in the month.
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