The harsh economic reality of a deep recession / depression was the “dish of the day” on Wall St. yesterday. The Dow Jones ended with its worst day since the 1987 stock market crash. It’s looking increasingly likely that all the efforts to unlock credit markets will be in vain as bleak economic data will lead us into a deep recession.
Today’s Market Moving Stories
- EU leaders are calling for a Bretton Woods 11 summit with China and India included. They want this to take place in November, with overhauling the IMF as part of the agenda. Problem is that we may all be living in caves by then. Solvency and contagion are now the key words.
- The downbeat Fed Beige Book last night provided the anecdotal evidence for what we already knew i.e. that the US is heading for a serious hard landing and a major recession. The Fed’s own vice chairman Kohn warned of a “prolonged period of cautious lending and a high capital cost.”
- Switzerland’s giant UBS (UBS) is to be bailed out. It will liquidate as much as $60bn in illiquid dud “assets” to a “bad” bank run by the SNB (the country’s central bank). They also got themselves a capital injection of $6bn. As with all these moves they tend to be good for credit holders and very bad news for diluted equity holders. Meanwhile Credit Suisse (CS) is going down the dangerous self help route with plans to raise CHF10bn in capital with Qatar seemingly in a charitable mood.
- China’s sovereign wealth fund [CIC] has lost a massive $5.4bn thus far in US money market investments. That should temper their appetite for a while!
- The BoE may have cut rates by ½% last week but that hasn’t stopped Lloyds (LYG) and the Woolwich jacking up their rates on tracker mortgages. More good news for the UK housing sector. Meanwhile estate agent Knight Frank cheerily told us that the fall in UK house prices was about ½ the way to where it was going!
- Credit rating agencies have put Hungary and the Ukraine on watch. Both have been doing very good Iceland impersonations of late.
US Bellwethers Routed
Yesterday started promisingly with a slight thaw in the interbank rates and great numbers from Coke (KO), JP Morgan (JPM) and Wells Fargo (WFC). But it ended in a rout with economic bellwethers such as Caterpillar (CAT) [–11.4%] and Alcoa (AA) [–12.8%] seeing their share prices tumble.
Commodities continued to crash (crude touched $73,) which resulted in Exxon Mobil (XOM) falling 14% and US Steel (X) dropping 17.7%. Retailers were also hit as Wal-Mart (WMT) dramatically slumped 8.1% and Macy’s (M) collasping 17.5%.
In sum the dump was very broad based and dispiriting. Hedge funds in particular were seen exiting the market. Their funds saw $43bn in redemptions in September. There was nowhere to run.
Stock Markets Refusing To Wait For Credit Market To Normailize
On top of the economic crisis, melting the permafrost of elevated fear-driven LIBOR and EURIBOR rates with a Bunsen burner takes time. Patience is one thing this market does not have.
The ECB’s finally changed their allowable collateral framework by cutting the required minimum credit rating on instruments. This SHOULD result in interbank rates in the Euro area “normalizing” i.e. begin to have some sort of relationship with where official rates are. The BoE will probably follow suit soon. While most welcome, this has come way too late in the game.
Confidence remains in the doldrums. Note the price action on my old tea leaf of global economic collapse, the Baltic Dry Freight index which is down 10,000 points in 5 months from its 12k peak. Deflation is on the horizon. Remember the 'D' word makes any debt you owe increase every year rather than decline. Nearly needless to say, it’s also poisonous for stocks. Central banks of the world need to unite and cut rates now.
Economic Data And Earnings Today
At 13:30 today, in the US, there is the weekly announcement of jobless numbers and September’s CPI inflation data (expected 5.1%). Later, at 14:15, there is industrial production, which is expected to rise slightly (0.9%) after last month's -1.1%. At 15:00, we will have a look at the Philly Fed Survey to see if anyone thinks that anything is going to get any better any time soon.