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What's behind the Global Stock market Shake-out?By Gary Dorsch In a keynote speech on February 2nd, in the northern Italian city of Turin, Bank of Italy chief Mario Draghi, warned global stock market operators not to assume that present favorable conditions would last. "It is not realistic to expect that the current orderly market conditions will last forever, we do not know where the next crisis will come from, we must do everything to be prepared," he said. "Market pricing does not currently incorporate the full range of potential risks. Financial market participants need to take into account in their risk analyses, the full implications of a possible reversal of the current benign conditions, including the possibility of less liquid markets," he warned. But Draghi is the "Boy who Cried Wolf", and few hedge fund or stock traders heeded his warnings. Central banks, including Draghi's ECB, are flooding the global money markets with liquidity, encouraging rampant speculation in financial markets. On Jan 29th, the ECB's Klaus Liebscher admitted, "Liquidity levels continue to be enormously accommodative, driven by high borrowing due to low interest rates," he said. The Euro M3 money supply is exploding at a 9.8% annual clip, it's fastest in 17-years!  Two of the biggest culprits behind the rampant speculation in global markets are the Bank of Japan (BoJ) and the Swiss National Bank (SNB), whose lending rates are so low, that an estimated $330 billion of "carry trades" in yen and Swiss francs are swirling around the global markets. On Feb 28th, the BoJ's Atsushi Mizuno, pointed to the side effects of keeping low interest rates near zero percent. "It could cause distortions in global asset prices by speeding up capital outflows from Japan." And on January 24th, SNB Chairman Jean-Pierre Roth told the annual meeting of the World Economic Forum. "My current thinking on the Swiss franc, which is going against the fundamental elements in the Swiss economy, is that it's part of the exuberance in the financial markets," before vowing to crank up Swiss loan rates. The SNB started cranking up rates from near-zero in mid- 2004 to its current 2%. Interestingly enough, the latest plunge in global stock markets came on the heels of a hike in the Bank of Japan's overnight loan rate to 0.50%, its highest in a decade, and renewed warnings by Swiss central bankers of a tighter monetary policy in the weeks ahead, and threats of a short squeeze on speculators betting against the Swiss franc. Earlier, on February 10th, G-7 central bankers warned currency speculators that they could get burned betting in one direction against the yen. Global Jitters Linked to Downturn in US Housing market Since former Goldman Sachs CEO Henry Paulson took the helm at the US Treasury last July, the Dow Jones Industrials (DJI) had marched 2,100-points higher, almost without interruption, and without more than a single 2% correction along the way. That was a winning streak unparalleled since 1964. It seemed as if the US Treasury and the Federal Reserve had gained complete mastery over the markets. "The combination of lower energy prices, job creation and a strong stock market has limited the impact of stagnating house prices on consumer spending," said Chicago Fed chief Michael Moskow on February 18th, hinting at the Fed's clandestine strategy. But the higher the DJI flies, the greater the amount of liquidity that is necessary to keep the stock market afloat, and prevent a boom from turning into a bust.  Then on Feb 15th, with the DJI climbing to within a stone's throw of the 13,000 level, Federal Reserve chief Ben Bernanke identified the depressed US housing market as the biggest risk to the Fed's goal of a soft landing of 2-_ to 3% growth this year and next. "The ultimate extent of the housing-market correction is difficult to forecast and may prove greater than we anticipate," he said. The "soft landing" scenario for the US economy was jolted on February 16th with news that housing starts plunged 14.3% in January to a 1.41 million annual rate, the lowest level since 1997. The Fed's 2-year rate hike campaign has toppled the US home building industry into a severe recession, and now a meltdown in the sub-prime US home loan market threatens the stock market. In other signs of severe distress in the all important US housing sector, sales of new US homes plunged 16.6% in January to an annualized rate of 937,000 units, the sharpest monthly decline in 13-years. The Mortgage Bankers Association purchase index fell 4.8% to 381.4 last week, below its year-ago level of 408.7, and is considered a timely gauge of US home sales. Suddenly, the first major crisis facing the Bernanke Fed arrived without much advance warning - a rash of defaults on sub-prime home loans that if unchecked, can drive the US economy into recession in 2007. Shares of many US sub-prime lenders, such as New Century Financial (NEW.N), and NovaStar Financial (NFI.N), have been brutally hammered in recent weeks, as defaults mount among homeowners with poor credit histories, and where there is smoke, there is fire. Skyrocketing property values during the US housing boom made it easy for homeowners to borrow heavily against their homes with second mortgages and home-equity loans. But if home prices continue to slide amid a glut of unsold homes and foreclosures, many over-extended homeowners will lose their ATM machines.  HSBC Holding, HBC.N Europe's largest bank and a major sub-prime lender in the US, shocked Wall Street by announcing that home-loan delinquencies have gotten so bad that it set aside $10.6 billion to cover potential losses. Delinquencies in the $1.3 trillion impaired-credit mortgage market exceeded 13% among borrowers with sub-prime adjustable-rate loans in the fourth quarter. The top catalyst of delinquencies was second-lien "piggyback" loans taken by borrowers for a down payment. Defaults could spiral higher as lenders are slated to reset as much as $1.5 trillion in ARM's this year. A credit squeeze could develop with major players such as HSBC and New Century taking big hits, the entire sub-prime industry is likely to tighten underwriting standards and throttle back on the highest-risk loans. So with the Dow Jones Industrials badly shaken to as low as 12,086 on Feb 27th, the Plunge Protection Team went into action to rescue the other important ATM machine. "There's not much indication that sub-prime mortgage issues have spread into other mortgage markets," Bernanke said on Feb 28th, triggering a 150-point rally in the DJI futures market, and allowing buy-side Wall Street investment bankers to shrug off the bearish news of a 16.6% plunge in existing home sales. The epicenter of Asian contagion is located in China, and how Beijing decides to deal with the Shanghai bubble, can have a great impact on the outlook for the Chinese economy, global commodity markets, and exporters in the region from Australia, Hong Kong, Japan, and Korea. Will Beijing try to prick the bubble and set-off a steep correction, or carefully calibrate a series of tightening measures to take some steam out of the market and simply flatten it out? To read the rest of this article, click on the link below: http://www.sirchartsalot.com/article.php?id=54 Feb 28, 2007 321gold |
