Someone stepped calmly into the market yesterday during the middle of a rout and bought. It must have been a big bid. We’ve never quite seen a chart pattern like it, where an entire index turns on a dime and replaces a steep fall with an equally steep ascent. What happened?
The story from the ASX is that a computer glitch caused trading in the futures market to be suspended for just over an hour in the middle of the day. Unable to hedge positions in the futures market, we are told, investors sold shares. And boy did they. Shares shed about AU$36 billion in market capitalisation before the glitch was fixed.
The fix - of the glitch - came in just as the ASX/200 declined to 5,500. That happened to coincide with the long-term level of technical support the index has enjoyed since beginning its fabulous run in 2003. If you drew a line connecting all the market lows from 2003 until yesterday, it would lead you right to the 5,500 level.
Is that it? It’s been no small correction, wiping some AU$80 billion in market value away and resulting in an 11% decline from the highs. It’s a massive correction. But it certainly doesn’t qualify as a crash. A crash is more in the order of a 20-30% decline in markets. That remains a possibility as long as markets are in the dark over who has the most exposure to asset-backed debt.
“You work in finance,” our barista reminded us this morning.
“Yes.”
“What’s going on?”
“The price of money is going up. The value of IOUs is going down. The value of everything else is in flux.”
“Oh. One sugar or two.”
“Better make it two.”
We didn’t have time for a more complicated explanation. But that explanation will do. “Risk is being repriced,” is one way of saying it. But it’s simpler to say the market price of money is going up. Non-bank lenders are going out of business, having made many bad loans. The remaining lenders have closed their wallets, barred the door, battened the hatches, and set the moat on fire with boiled oil.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Jeoff on 17 August 2007:
Interesting. A "glitch" in the futures market was also cited in a recovery at the end of a hard downward day in the US market last week. Smells like manipulation. Do the Aussies have an equivalent to the US PPT?
Comment by kage on 17 August 2007:
More interesting still is that no public announcement of the fact was made until after it was fixed - even today no announcement on the SFE corporate website (now part of the ASX site). I had to find this out on Bloomberg, on the other side of the planet! Bloomberg also reported on the RBA intervention overnight, quoting an unnamed RBA official. Again no public announcement on the RBA website (that I can find anyway). Much chest thumping about halting the fall in the AUD at .7869 I now note it is .7742 Worked a treat - not.
If there is an Ozzie PPT it is ineffective.
Comment by dubious pete in melbourne on 21 August 2007:
I don't believe we have a PPT here. Not because we do not have sufficient people capable of pullin git off, but mostly because of the supply demand position in our markets. We are the 4th largest investment market in the world after all. If you are talented, you can earn a very healthy income working in a boutique fund manager or other bigger one. Govt sdoesn't pay that much.Now if there did appear to be a PPT that got it wrong, then I'd say yep- some amateur got it wrong.