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Just when everyone was starting to get complacent again, the market has come back and slapped investors in the face.
Yesterday’s triple-digit plunge in major stock markets was a not-so-gentle reminder that this isn’t a one-week summer storm in a teacup, as some commentators have already been suggesting.
The truth is, this crisis has barely even begun to get going…
Most of the major papers were running stories yesterday along the lines of – “Is the crisis over so soon? Bravo, the Federal Reserve. Well done central banks of the world. Isn’t modern finance wonderful?”
This burst of utterly irrational exuberance was probably the most obvious indicator that markets were going to take a dive later in the day.
It’s just utter nonsense to be wiping the sweat from brows and saying “Phew! Thank goodness that’s over!” For a start, we’re in probably one of the deadest weeks of the year as far as markets are concerned. Plenty of the big guns and decision makers are still on holiday, so anything that happens just now is pretty much a holding pattern ahead of September, when everyone gets back to work and starts to think about the mess they’re in.
So what was worrying markets yesterday? Well, the same things that are going to keep worrying markets for the foreseeable future. The US housing market, and the troubles in the commercial paper market.
First, we had US house price data. The S&P/Case-Shiller US National Home Price Index was down 3.2% in the second quarter on last year, its sharpest fall since the index began in 1987. The Consumer Confidence Index also took a nose-dive in August, falling from 111.9 in July to 105.
Meanwhile, the troubles in the commercial paper market (which we’ll be delving into in great detail in this week’s issue of MoneyWeek) continued to cause ructions. Barclays denied a report in the FT that suggested it had exposure of several hundred million dollars to debt vehicles created by it for troubled German bank Sachsen, but the market still marked down its shares by 22p to 589p. Other financials were weaker too.
But never mind, eh? Central banks can come to our rescue – in fact, why haven’t they already? This is the attitude typified in a comment from Gerald Baker, The Times’s US correspondent, who wrote yesterday: “One question that will dog the Fed in the next few months will be the accusation that it wasn’t timely enough in responding to the financial markets.” If the panic is over so soon, he ponders, could the Fed have ended it even more quickly by intervening sooner?
It’s an incredible statement, and shows just how much the “Greenspan put” has become part of the Wall Street thinking process. The Fed has turned into Pavlov’s dog as far as the markets are concerned. Just as Pavlov trained a dog to salivate when he rang a bell, the markets now think they’ve trained the Fed to cut rates as soon as they hit a losing streak.
It may well be true. Given Alan Greenspan’s penchant for cutting rates quickly and sharply at the faintest hint of a bit of pain for the financial markets, it’s no surprise that Wall Street thinks it has the Fed on a tight leash.
But even if the Fed cuts rates now, the good old days of Ninja loans aren’t coming back. The threat of class action lawsuits and the reality of mass redundancies at mortgage lenders and falling house prices has seen to that. The US housing market isn’t going to be bailed out, and that means the US consumer is in for a painful come down.
All that lowering interest rates does in this scenario is prolong the pain, by allowing ailing companies that should be denied the oxygen of cheap credit, to limp on. It’s something that Japan discovered in the Nineties and from which it is still suffering the ill-effects.
Here in the UK, plenty of people are still arguing that we don’t have a subprime problem. But they shouldn’t get over-optimistic. In this week’s issue of MoneyWeek, we take a look at why the UK’s subprime problem could be much worse than most estimates reckon. If you’re not already a subscriber, you can sign up for a three-week free trial by clicking here: Sign up for a three-week free trial of MoneyWeek.
Turning to the wider markets…
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In London, the FTSE 100 ended yesterday 117 points in the red, at 6,102, as financial stocks including Schroders and Standard Life weighed. However, the day’s biggest loser was miner Lonmin which tumbled over 6% as metals prices slumped. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 also notched up triple-digit losses, ending the day 116 points lower, at 5,474. Financial stocks such as BNP Paribas and Societe Generale were the day’s biggest fallers. In Frankfurt, the DAX-30 was 55 points lower, at 7,430.
Across the Atlantic, the Dow Jones was down 280 points to 13,041 as all but one of its components ended the day in the red. The tech-rich Nasdaq was 60 points lower, at 2,500. And the S&P 500 closed at 1,432, a 60-point fall.
In Asia, the Nikkei was down by as much as 274 points to 16,012, whilst the Hang Seng had fallen by as much as 343 to 23,020.
Crude oil was at $71.67 this morning and Brent spot was at $69.62.
Spot gold was little-changed at $663.60 this morning and silver had crept up to $11.76.
In the foreign exchange markets, the pound was at 2.0056 against the dollar and 1.4745 against the euro. And the dollar was at 0.7350 against the euro and 114.49 against the Japanese yen.
And in London this morning, miner Antofagasta announced first half profits of 12% thanks to the strong copper price, although sales declined 4.9%. The company said in a statement that ‘market fundamentals remain sound with strong demand in Asia and Europe’, but concerns over downside risk in the copper price saw Antofagasta’s stock fall 1.5% in early trading.
And our recommended articles for today…
A watershed for the global economy?
– Increasingly wary investors are crossing more and more items off their shopping lists. Could investor sentiment reach rock bottom – namely, a loss of confidence in the dollar? To read more from Charles Stanley’s Jeremy Batstone on why we are at a critical juncture, see: A watershed for the global economy?
How to cash in on the renewable energy boom
– So far this year, precious metals have failed to match the gains of their industrial counterparts. But investment demand is about to pick up – so be sure to buy in before the summer ends. Click here to find out why the current lull is merely a buying opportunity in this bull market: Precious metals are about to play catch-up
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