It looks like being another down day for Australian stockmarkets as investors worry about the impact of the US sell-off after the Fed cut rates, and the lack of clear cut leadership from the ASX on the situation of troubled margin lending broker, Tricom.
Tricom’s problems in settling trades and the ASX’s haphazard release of timely and transparent information has damaged local sentiment and meant investors sold off shares despite solid leads from offshore earlier in the week.
The Fed’s 0.5% cut in its Federal Funds Rates was widely expected. The Dow jumped from being around 37 points up before the news was announced this morning, to over 100 points, before a late sell-off saw it close with a 37 point loss.
That battered sentiment here and our market fell at the opening to be down by nearly three per cent, or more than 150 points at one stage, before bouncing after 11am to trade around 75 points lower at 11.30am.
This was after a nasty 1.7% fall yesterday which saw an early gain reversed and then converted into a worrying fall as news about Tricom’s inability to settle trades speedily and on time percolated through the market for a second successive day.
In olden days in London, defaulting brokers were “hammered” by the London exchange and on the Lloyds Insurance market. To the best of our knowledge, Tricom hasn’t reached that stage yet, but its inability to settle trades is worrying. Today could very well be the test. But there’s talk of legal action over some of its sales of shares, so the firm’s future could remain uncertain for some time yet.
The Fed’s rate cut came as we have solid evidence the US economy tipped closer to recession in the December quarter.
The US economy has seen growth jump to a strong 4.9% in the September quarter, only to fall to a miserable 0.6% annual rate in the fourth quarter with the main culprit being a 23.9% plunge in “new fix housing investment”, which is home building and associated work, and a sharp rundown in inventories by companies worried about falling demand from consumers.
It’s clear now the Fed’s rate cuts since September of 2.5% (the Federal Funds rate was at 5.5%) have so far had no impact on housing demand, the economy or consumers. Consumers have slowed their spending, the number of new mortgage applicants continues to fall, despite the rate cuts, and the losses on Wall Street among the banks and others who brought up the subprime scandal in all its facets, have grown.
The GDP number was the first of three estimates and could very well be upgraded as others have in the past, but it does show the extent of the slowdown that took the Fed and the markets by surprise, with some economists reckoning that much of the slump occurred in late November and December, when the credit freeze returned in full force to grip markets.
Wall Street entered negative territory as investors became anxious that ratings agencies may downgrade bond insurers AMBAC Financial Group and MBIA as early as today.
The fourth-largest bond insurer, Financial Guaranty Insurance, lost its AAA credit rating by Fitch Ratings, after it missed a deadline to raise capital and Standard & Poor’s said it may cut or reduce ratings on $US534 billion of subprime-mortgage securities and other debt, a move that may extend losses at banks and investors.
Some in the markets say the UK Government will now have to take over the stricken Northern Rock mortgage bank as a result of the latest ructions, a move that will hit the UK Government’s finances, while the future of wobbly French Bank, Societe Generale, will bear watching.
The French Government may try to force a “shotgun wedding” with BNP Paribas which is profitable, but has subprime mortgage losses of its own. But no rogue trader, so far!
The futures market is pointing to a lower opening on Wall Street tonight, while Asian markets were lower in early trading.
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