It’s going to be a nervy day on local markets today after Wall Street fell sharply on Friday and the prices of major commodities also slumped.
After our market shed 4.1 per cent on the ASX 200 last week (and which closed lower on Friday at 5786, with the All Ords also down at 5775) the last thing investors would have wanted was a bone rattler on Wall Street and other markets on Friday night.
But that’s what they got.
The Dow lost 120 points or about 1 per cent, while the broader S&P 500 index fell 1.1 per cent. NASDAQ composite fell 1.5 per cent on Friday: all big falls but amplified by the nervousness ignited by Tuesday’s big fall, the biggest since September 11, 2001.
For the week, the Dow lost 4.2 per cent and saw its worst decline on a percentage basis since late March 2003; The S&P 500 lost 4.4 per cent for the week, in its worst weekly performance since late January 2003 and NASDAQ fell 5.8 per cent this week, the worst drop in just over two and a half years.
US Government 10 year bonds finished at 4.5 per cent, equal to the level set in the aftermath of Shanghai Tuesday last week and a sign that more and more investors are retreating from the sidelines.
Here the SFE Share Price Index was showing a 47 point fall Saturday morning for the ASX 200 when trading resumes today. But everyone will be watching how China and especially Tokyo open later on.
US investment banks such as Goldman Sachs, Merrill Lynch, Bear Stearns, Citigroup and big banks in Europe such as HSBC, UBS and Credit Suisse all saw their share prices under pressure last week because investors perceive them to be engaging in risky activity: whether it is emerging markets, private equity, hedge funds, aggressive proprietary trading or servicing the troubled US housing market, including the imploding subprime sector.
Anything to do with risk is now being avoided by investors so it will be interesting to watch the prices today of Macquarie Bank (up in Friday’s down market after a profit upgrade), Babcock and Brown, Allco and Allco Equity Partners and similar sorts of listed investors.
Qantas firmed to over $5.20 on Friday in the wake of the ACCC’s approval of the buyout on Thursday.
The Foreign Investment Review Board is expected to deliver a report on the Qantas deal to Federal Treasurer Peter Costello this week. The price of retailer Coles should be watched because of the delicacy of its situation.
Should markets continue to be rattled and bond markets see a big flow of cash to safer havens, private equity deals will start disappearing because of their inherent risky levels of leverage.
It may be temporary but until the situation clarifies itself companies like Coles will be difficult trading situations.
Day traders will find life tougher because the usual trick of buying and selling within the T3 settlement period in Australia was exposed as very risky last Tuesday: deals could be done but profits evaporated.
European markets had their worst week for four years last week while Asian markets were very rickety by Friday.
Tokyo’s Nikkei ended the week down 5.3 per cent and the Shanghai Composite index fell 5.6 per cent. In London the FTSE 100 fell 4.5 per cent – its worst week since March 2003.
Those official worries about the US subprime mortgage market emerged Friday when the Federal Reserve and other US financial regulators said they were worried that some borrowers did not understand the risks of such loans.
All lenders have been directed to improve levels of information about their clients and to ensure that clients fully understand the financial products they are buying.
As well, the US market authorities are starting investigations into the accounting at several leading subprime mortgage originators: it won’t be the last we have heard of this troubled sector.
What would have concerned US investors was the fact that leading the Dow lower on Friday were banking heavyweights, Citigroup and Bank of America.
They are the two biggest American financial services groups and investors sold them off because of rising worries about the economy, the markets and their investment activities, including rising mortgage defaults.
