MARKET WRAP: US Troubles Continue to Travel
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July 27, 2007
US
US markets took a precipitous fall today, with the DOW dropping 450 points before gaining back some ground and leveling off at 311 points down. The selloff was widespread, with both the DOW and S&P 500 dropping about 2.3% and the Nasdaq down 1.8%. The downturn was the most dramatic since the Shanghai debacle five months ago, when the DOW lost 416 points. Today''s selling epidemic follows a substantial drop on Tuesday, the biggest since March 13. This is a sour note for major financial players in the US, who will have to re-think strategy as credit tightens and capital becomes harder to come by. With the cost of borrowing on the rise, the company buyouts that have fueled record gains in recent years may be coming to an end.
The plummet was triggered by a familiar culprit - serious concerns regarding the US sub-prime mortgage and housing markets. Both problems have worsened in recent weeks. In other news Countrywide had its biggest fall since 2004 after revealing that its fiscal problems extended to more than just its sub-prime business. In a statement that did not come as good news to those involved in building and selling real estate – and the many underlying businesses – DuPont’s CEO said he expects the US housing slump to continue for some months. USG Corp also projected a gloomy US housing market outlook. US home sales fell in June to a 4 ˝ year low.
On a brighter note, Earnings season took off with a bang this week. Amazon was a big winner, with quarterly net profit increasing by 250% over 2006. On the back of its new Dreamliner aircraft and strong defence sales, Boeing also posted a higher than expected second-quarter profit. Apple did the same thanks in part to 270,000 iPhone sales.
In the latest chapter of a leviathan US company on the ropes, Ford Motor Co. announced Thursday that it expects to post its eighth consecutive quarterly loss.
Asia Pacific
New Zealand saw a rise in interest rates as expected, though the Reserve Bank of New Zealand (RBNZ) signaled that rates would hold at the current 8.25%.
In Australia, higher than expected second-quarter inflation data stirred talk of an interest rate hike in August. Rates are currently 6.25% and could be in for a rise when the Reserve Bank of Australia meets on August 7th. After coming close to a record close on Friday, the Australian share market declined this week. On the positive side, BHP Billiton reported a number of annual production records led by strong fourth-quarter gains in copper, nickel and coal. Australia’s company-reporting season starts next week.
The Asian Development Bank stated that it has raised its forecast for economic growth for East Asia to 8.1%.
China shrugged off last week’s interest rate hike with the Shanghai Composite Index clocking a healthy performance this week.
In Japan, strong earnings reports from Honda and Nintendo boosted prices. South Korea saw an intra-day record on its share market on Thursday.
UK
UK followed global concerns about the US sub-prime mortgage market, with UK markets down overall. It appears that consolidation is in store for life insurance companies with a possible tie up between Friends Provident and Resolution.
End note
As today’s selloff suggests, US sub-prime mortgage problem will not go away and is spreading rapidly into Asian and UK markets. The financial sector has been hit the hardest, with banks and other financial stocks taking a beating. Sell-offs are occurring regardless of whether the company has exposure to the US sub-prime market, so from a fundamental standpoint there have been opportunities to pick up battered stocks at discounted prices. It appears that markets in general are becoming more risk-averse and that troubles in the US are having a market-dampening effect worldwide.
Happy investing!
Julia Lee
Head of Fundamental Analysis
HUBB Financial Group
Trading Tutors
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