A relief rally if we’ve ever had one yesterday as virtually anything that had been hammered in the past few weeks by nervy investors, were chased by the same investors now after perceived ‘value’.
The optimism of the punter triumphed over the reality of the situation yesterday as local investors finally decided to let their hair down and grab some of the rebound US investors experienced late last week.
The Australian market rose 3.5% yesterday, its largest one-day gain in four months, as a smaller-than-expected loss at a Citigroup Friday in the US eased credit market worries.
But oil prices moved back towards $US130 a barrel, which should have been enough to worry investors here, but they shrugged off any concerns and chased shares higher for most of the day.
The benchmark S&P/ASX 200 index rose 171.4 points to 5011.8, posting its biggest single-day percentage rise since March 25, in the aftermath of the rebound after Bear Stearns was rescued by the US Federal Reserve. That rally last to Mid-May, then ended in tears and big losses.
Despite yesterday’s rise, the index has lost 21% since the start of the year, almost double the 11.8% gain for all of 2007.
Wall Street slipped overnight, but will go lower today after some leading companies reported strong quarterly profits, but cut their guidance for the next few quarters.
Oil traded above $US131 a barrel, other commoduities firmed and European and Asian markets finished higher.
Our market will open lower according to thje futures market after those poor results, which also sent US futures markets down 1% in after hours trading.
Macquarie Group, Australia’s biggest investment bank, rose 4.8% to $48.10. It holds its AGM in Melbourne tomorrow.
The big banks all gained more than 3%, with NAB up 4.9% at $28.32 and the Commonwealth Bank rising 3.7% to $43.35.
BHP Billiton added 4.2% to $38.20 and Woodside Petroleum, Australia’s second-largest oil and gas producer rose 1.6% to $56.40. Rio Tinto jumped 2.9% to $118.49. The BHP 3.4 share bid for Rio was worth $129.88.
And yet nothing has changed: oil is a bit weaker, but four months ago it was 40% cheaper and that, plus one more round of interest rate rises from the banks, have tightened conditions the economy for all businesses; growth is slowing around the world, even in China, and now investors seem to think that things are on the up.
Just as investors did in the US last week as they chased battered financial shares in particular.
But over the weekend two gloomy forecasts should make investors pause and think.
The chairman of Citigroup, Sir Win Bischoff sees a gloomy couple of years for the US and UK markets and economies, while in a series of very frank comments, US Treasury Secretary, Hank Paulson, saw worse for the US economy before there’s any sign of improvement.
Sir Win told the BBC that house prices in the UK and the US are likely to fall for another two years. He told the BBC that he expects it will take two years for the markets to "stabilise" with the credit crunch – and the fraught conditions in financial markets – to continue through 2009.
Citigroup lost $US2.5 billion in the first quarter (which was better than expected and one of the reasons why our market rose yesterday), but another batch of asset write-downs took the banks’ losses from falling asset values to a massive $US55 billion (which is around the market cap of the ANZ Bank).
Figures on retail sales and several other indicators this week will confirm the extent of the malaise in the UK economy: problems which made the country’s Chancellor of the Exchequer tell a newspaper in an interview that there was no more spare money to boost public spending to offset the impact of the slump.
That’s why the UK Government is changing its own rules on borrowing limits to give it the ability to spend more next year in the run up to an election.
The other warning came from US Treasury Secretary Henry Paulson.
He said in TV interviews in the US on Sunday that "I think it’s going to be months that we’re working our way through this period – clearly months".
Paulson said the number of troubled US banks will increase as they struggle to cope with big losses on bad mortgages. The government this month took over IndyMac bank in California after a run led it to become the largest regulated bank to fail in the US in 24 years.
"Of course the list is going to grow longer given the stresses we have in the marketplace, given the housing correction. But again, it’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation," he said in broadcast interviews.
"We’re going through a challenging time with our economy. This is a tough time.
"The three big issues we’re facing right now are, first, the housing correction which is at the heart of the slowdown; secondly, turmoil of the capital markets; and thirdly, the high oil prices, which are going to prolong the slowdown," he said.
But it’s no wonder the Citigroup chairman is gloomy about the next 18 months to two years.
Here’s what one of his bank’s UK economists wrote last week:
"’The pain is not over’, writes UK Economist Michael Saunders, ‘as the vice-like squeeze from the credit crunch and inflation pressures intensifies… the housing market remains in freefall,
