War Talk Puts the Fear of October into Markets
By Aaron L. Task
01/27/2003 18:06
U.S. financial markets were caught between a Blix and a hard place Monday, with stocks and bonds falling in concert while the dollar and gold rose modestly in tandem.
Dissecting the interplay of different markets is tough, but those seemingly contradictory developments suggest financial markets were somewhat stuck in a bearish limbo following hawkish comments by United Nations weapons inspector Hans Blix and ahead of President Bush's State of the Union address Tuesday.
After trading as low as 7957.82 intraday, the Dow Jones Industrial Average ended down 1.7% to 7989.56, closing below 8000 for the first time since Oct. 14. The S&P 500 shed 1.6% to 847.48, its lowest close since Oct. 14, while the Nasdaq Composite shed 1.3% to 1325.30.
Simultaneously, Treasuries received no 'safe haven' benefit as traders contemplated the timing of presumptive military action against Iraq. The price of the benchmark 10-year Treasury note fell 8/32 to 100 11/32, its yield rising to 3.96%.
Some observers said money coming out of Treasuries actually kept stocks' weakness contained, and midmorning indications of a more vicious decline did not come to fruition. Others noted corresponding weakness in the dollar vs. the euro, suggesting a widespread trend of funds flowing out of U.S. assets.
However, the U.S. Dollar Index ended the session up fractionally to 99.23, thanks to rumors the Federal Reserve might intervene to aid the greenback. The dollar was notably strong vs. the yen after Japanese finance minister Masajuro Shiokawa said Sunday his government will "take measures to weaken the yen."
Meanwhile, gold futures traded as high as $373.70 before closing up 0.3% to $369.40 per ounce, although the Philadelphia Stock Exchange Gold and Silver Index finished down 3.2%. Oil futures declined 3% to $32.29 per barrel and major producers such as Exxon Mobil XOM were weak while oil service plays such as B.J. Services BJS tumbled as well. The Philadelphia Stock Exchange Oil Service Index fell 4.5% and the Amex Oil & Gas Index lost 2.7%.
Oil's decline was attributed more to reports of Venezuela's production restarting than concerns about potential war with Iraq, but that subject dominated other markets.
Speaking before the U.N. Security Council, Blix said, "Iraq appears not to have come to a genuine acceptance, even today, of the disarmament," and again criticized its December weapons declaration as insufficient. There are "strong indications" Iraq produced (and retained) more anthrax than it declared last month, Blix said, adding Iraq also may have produced the nerve agent VX and that tons of chemical agents remain unaccounted for. He also expressed concern that the recent discovery of some chemical weapons munitions might be "the tip of a submerged iceberg."
Blix's comments followed recommendations from U.N. envoys from China, Germany, Russia and France that weapons inspectors be allotted more time. Mohamed El Baradei, head of the International Atomic Energy Agency, made a similar plea, saying a few more months "would be a valuable investment in peace because they would help us avoid a war."
However, U.S. officials -- most notably Secretary of State Colin Powell, who said "Iraq's time for choosing peaceful disarmament is fast coming to an end" -- seized on Blix's comments. The inspector was more hawkish than many had expected, supporting the U.S. stance that the burden remains on Iraq to comply with U.N. resolutions rather than on the U.S. to explain a hard-line approach that has rankled some allies. Expect President Bush to harp on this issue of Iraqi noncompliance -- Powell called it "passive cooperation" -- in Tuesday's State of the Union speech.
Powell reiterated that the "U.S. reserves its right as a sovereign nation to use force" even if the U.N. Security Council does not approve military action but announced no deadline. Most observers believe the U.S. will wait until a scheduled meeting later this week between Britain's Tony Blair and Bush before deciding (or at least, announcing) a timetable for military action.
Following some hawkish comments by Powell over the weekend, there was concern heading into the session that the U.S. would adopt a "go-it-alone" approach if Blix demurred on playing hardball with Iraq. He didn't, but that didn't seem to allay traders' concerns. The notion that U.S. stocks will rally "at the sounds of cannon fire" remains widely held among market participants, but few saw any reason to buy shares Monday in anticipation of the outbreak of hostilities.
Bulls and Bears
Wall Street seers are trying to look beyond -- or at least around -- the geopolitical developments, which are currently dominating sentiment.
Recent market action has "fan ned the optimism" of Thomas McManus, equity portfolio strategist at Banc of America Securities. In a note Monday morning, McManus, who has grown more bullish since midsummer, argued that investor sentiment has become more bearish -- presumably a contrarian indicator -- in the wake of "downward earnings guidance, the potential for an extended uneasy stalemate in Iraq, a noticeable decline in Presidential approval and increasing concerns about the economy."
On Monday, the CBOE Market Volatility Index traded as high as 40.89 before closing up 11.2% to 39.77, its highest close since Oct. 24. In addition, the equity put/call ratio rose to 0.86 from 0.83 on Friday while the one-day Arms Index closed at 2.32 after trading as high as 3.77.
Increases in bearish sentiment have been accompanied by short-term rallies in recent years. However, not everyone is convinced the recent selling is about to reverse anytime soon.
On Friday, James Rohrbach of Investment Models , issued a sell signal on the New York Stock Exchange , reversing a buy call made on Nov. 1. (From the close on Nov. 1 through Friday's close, the Dow fell 5.1% and the NYSE Composite declined 4.3%, adjusted for changes to the index's computation as of Dec. 31.)
Last Wednesday, Rohrbach reversed a buy signal on the Nasdaq adopted on Jan. 6. (From the close on Jan. 6 through Wednesday's close, the Comp fell 4.4%.)
Rather than trying to pinpoint exact market tops and bottoms, Rohrbach's work is designed to avoid big declines and capture the bulk of rallies. These recent sell signals are an indication he believes substantial weakness is coming.
"You won't find me sticking around when the market trend turns down," he wrote. "One thing is certain: You can't lose money when you are out of the market; opportunity yes, money no." |
