'Gloom' Over Markets

Navigation: Main page

 Print this page Submit articleComment article

Author: Australasian Investment Review

Article source: http://www.articledeshboard.com/. Used with author's permission.

Watch those markets closely; as the Financial Times said in its headline on the weekend, "Gloom envelopes world markets".

And there's more to come. The gloom is deepest in the US.

First Wachovia, Bank of America and JP Morgan Chase said they would be hit by billions of dollars of losses in the fourth quarter: this was on top of reports last week from Washington Mutual, America's biggest savings and loan group and Morgan Stanley, that they also faced billions more than forecast or expected in losses from the toxic subprime investments they had made.

As well, speculation is rising that huge global bank, HSBC, will also reveal new losses for its subprime mortgage loans and other dealings in the US when it reports profits this week.

HSBC was the first major bank to report problems with subprime mortgages and the associated CDO credit derivatives in February and March. It put aside around $US10.8 billion to cover losses in those deals and other parts of its lending book in the US and around the world.

Stockmarkets on both sides of the Atlantic took a pounding last week and finished the worst week in months on Friday as deepening economic gloom raised expectations that the US Federal Reserve would be forced to cut rates again in the face of mounting credit losses.

Investors quit shares for oil, gold, US government bonds but not copper, which fell. The yield on the 10 year US Government bond fell to 4.23%, the lowest for more than 2 years and more than 1% under the peak of 5.32% reached in the first week of June.

Investors also bought yen which rose against most major currencies; the value of high yield currencies like the Aussie and Kiwi dollars fell sharply Friday night.

The Aussie dollar lost 2 USc in value, a steep fall which hit the value of the BHP bid for Rio Tinto, cutting the Australian dollar value of both companies shares based on their London close (see story below).

Some analysts suggested that sentiment is now gloomier than it was during the August credit freeze with US investor concerns about the worsening state of the US economy.

More figures this week will test sentiment on inflation and home sales.

Analysts say the losses keep coming for big and small groups, and there are rumours big banks in Britain and Japan could surprise with huge losses.

Figures in London media at the weekend said that Britain's big eight banks had shed $A300 billion in market capitalisation in the past year (that's more than the market cap of CBA, NAB, ANZ, Westpac and St George) because of the subprime woes, and the collapse of Northern Rock bank and its rescue by the Bank of England.

The move by investors into oil and gold took them to historic or near historic highs, but copper weakened sharply and is now in the midst of its worst slump since 2002.

The Dow tumbled 223.55 or 1.7% on Friday to 13,042.74, as retailers, banks and consumer products companies shed value. The Dow has dropped 361 points on midweek.

Tech stocks, which have supported much of the US market for most of this year, got a dose of the shakes with reports of slowing demand from the financial sector, usually a huge buyer of computers, software and internet products, and falling demand for mobile phones and services.

The NASDAQ lost 68.06, or 2.5% to 2,627.94. The Standard & Poor's 500 index fell 21.07 or 1.4% to 1,453.70. That was a fall of 3.7% last week.

NASDAQ had its worst week since April 2002, losing 6.5% in value, and the Dow lost 4.1%.

In London, the FTSE100 fell 3.7%, while the FTSE Eurofirst 300 was down 3.1%: the biggest falls since the credit freeze started taking hold in late July and early August.

In the US the yield on the two-year Treasury note fell to 3.41%, the lowest since February 2005 while the yield on the bellwether 10 year Bond tumbled to 4.23%.

US reports say the turmoil on Friday came from several sources:

The most worrying was the emergence of fire sales of mortgage assets from complex debt vehicles (such as conduits and SIVs) after the trustee of a $US 1.5 billion debt deal managed by State Street Global Advisors, started liquidating its portfolio.

These fire sales follow the downgrade of ratings on subprime mortgage linked securities and funding deals. Trustees are reported to have issued default notices for more than 14 collateralised debt obligation deals in recent weeks, representing securities with a face value of more than $US10 billion.

The fear is that these fire sales will see very low market values established, which will in turn force big banks and other investors to make further write-downs in the value of similar securities they are carrying on their balance sheets.

It could be a real downward spiral of falling values and write-downs feeding off each other.

US analysts say default means the holders of the most highly rated (and secured) securities, usually AAA or AA in the CDO can sell the underlying assets to try and get their money back. Analysts say more deals are on the brink of default.

More factors in Friday's nervousness included news from Wachovia, America's fourth biggest bank, which estimated the value of its subprime mortgage securities fell $US1.1 billion last month and said it was increasing loan loss provisions because of "dramatic declines" in house prices in some parts of the US.

Bank of America and JPMorgan Chase also warned in regulatory filings that they could face further write-downs in the fourth quarter.

Fannie Mae, the government-sponsored mortgage company, said its third-quarter loss doubled to $1.52 billion and Credit One, the leading credit card issuer, said more customers had difficulty paying their bills in October than in the third quarter: that was two days after it said it had lifted its provision for such bad debts to the 'mid five billions' from $US4.9 billion.

Fannie Mae's news was important as it is the biggest source of money for US home loans. It said its third-quarter loss more than doubled as the deepening housing slump increased mortgage delinquencies. The net loss was caused by a $US2.24 billion fall in the value of derivative contracts and $US1.2 billion in credit losses among the $US2.7 trillion of mortgage assets Fannie Mae owns or guarantees.

Outside the US, reports about problems at Barclays Bank in the UK and Mizuho Financial Group in Japan centred on claims that they will report losses on subprime-related assets.

Barclays denied this strongly and revealed at the weekend it was working with its auditors to produce a convincing set of accounts and financial report. The big Japanese bank though has been reported ready to reveal losses in the next few days, as well as continuing problems from a worsening domestic finance company industry collapse.

So what happened here on Friday?

The market finished up 25 points for the ASX 200 on the BHP bid for Rio, but was up 80 points at one stage.

The National Australia Bank reported a record profit, with bad debt provisions falling, compared to the rises at its peers.

NAB shares firmed $1.21 on Friday to $43.40 in the market set alight by the Rio Tinto bid from BHP Billiton.

Still, that wasn't enough to offset the weakness and the market lost ground in the afternoon. The All Ords closed at 6607.40 on Friday (an up day) down 1.77% from the previous Friday close of 6726.70.

Today will see the market fall given the plunge on Wall Street and the mixed news from London on the BHP share price and the falling copper price.

In contrast to the woes in overseas market for banks, the big five ended the week in a strong position.

The CBA was valued at a touch over $78 billion ($59.40), down $2 billion from the week before.

The NAB was higher, thanks to Friday's rise after the profit statement. Its market cap finished at $70.60 billion.

ANZ $52.12 billion ($27.95) and Westpac $53.3 billion ($28.62) were solid but down from the week before. St George ended on $37.51 and a market cap of $23 million short of $20 billion.

There is a real sense of suspicion about the new bloke at the ANZ, Mike Smith. The shares are off more than 8% since he spoke at the profit announcement late last month.

The banks were sold off because of concerns about a flow on from those problems in the US. The ANZ fell 2% and CBA 1.8%.

But they are still healthier than their peers in the US and UK where every financial group has experienced a sharp loss in market value so far in 2007.

Looking at the best performers of the week in the ASX 200, Rio was the top for obvious reasons, with Bolnisi Gold chasing the rising gold price higher. Nufarm rose because of the bid from the US and Chinese consortium, Newcrest also chased the rising gold price higher with a 9.6% rise and Macmahon Holdings was up 10.1% on the formalisation of the link with Leighton and an optimistic AGM on Friday.

Flight Centre rose 8.1% ahead of being put into a trading halt Friday pending the announcement of a buy in the US, which will be revealed this week.

Woodside and Oil Search followed the oil price higher.

Among the under-performers in the ASX 200, most of the 10 laggards were marked down for having US dollar income or being in financial services, such as Babcock & Brown, down 6.3% at $27.60.

Emeco Holdings, the heavy plant equipment hire company, shed 18.6% of value related to a poor outlook because of the US dollar's impact. It gets most of its offshore income in US dollars.

Brambles was another to be hit by concerns about the value of the Aussie dollar and claims by Asciano that it wasn't a bidder for the company, but would sit on its 4.09% holding. Brambles fell 11.8% to $12.30, Asciano shares jumped 48c to $8.90. That's not a long term position that is believable.

Wesfarmers shed $5.11 or 11.8% after winning the hand of Coles and going ex-dividend. WES shares ended at $38.15.

Seek shares fell $1.03 to $8.12 after a less than convincing AGM in Melbourne and outlook.

BlueScope Steel was hit by US/Australian dollar worries and the shares slipped 10.9% to $9.48; Downer EDI was another loser for the second week in a row shedding 10.8% to $5.16 (but had a rise on Friday).

Envestra, the property group, lost 9.8% to $1.01, ABC Learning 9.1% to $5.85, and CSR $8.5% to $3.12. The ANZ Bank shed 6.7% to $27.95.

IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.

Australasian Investment Review (AIR) is a free daily news service with a weekly online magazine covering global financial markets with a focus on Australia, New Zealand and Asia. Each day our team of experienced journalists presents you with a concise digest of expert opinions and analysis on trends and backgrounds that matter in these markets. Subscriptions are free at aireview.com.au