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At the gates of hell

Contagion-like selling batters resources stocks across the world, dragging down stock exchanges, as the dollar remains firm and the global economy stumbles on.

Barry Sergeant
09 September 2008 18:39

JOHANNESBURG – -

Listed resources stocks swooned across the world on Tuesday, dragging stock markets sharply down, as the dollar maintained its bullish tone, and investors once again confronted the specter of slowing global economic growth.

Despite hurricanes across the Gulf of Mexico, benchmark crude oil prices were eyeing $100 a barrel, nearly a third lower than the record highs seen on July 15, less than two months ago. However, rather than the potential benefits feeding through into the endless number of stocks that benefit from lower energy prices, investor sentiment remained raggedly negative.

In the past few months, the world's top 20 mining stocks, along with the top 20 oil stocks, have surrendered $2trn in market value, or capitalisation, damaging stock indices across the planet. Over the past six years, resources stocks have grown to be increasingly influential components of a number of stock exchanges, not least Australia, Canada, South Africa, Brazil, Norway, New Zealand, and even London.

While the 30 components of the Dow Jones Industrial Average include only three resources names, in Exxon Mobil, Chevron and Alcoa, their contribution to the index is $577bn, or 15%, and influential in moving what many regard as the world's most watched stock barometer.

At around midday New York City time on Tuesday, major mining stocks that were falling by more than 10% on the day included Xstrata, Mosaic, and ENRC. The world's 20 biggest oil stocks were falling by a relatively modest 4%, on average, but the 20 biggest mining stocks in the world had shed more than 6%, on average.

BHP Billiton, the world's biggest diversified resources stock, was down by 7%, while Exxon Mobil, the biggest oil major, had shed less than 2%. Among silver stocks, Silver Wheaton, Silver Standard and Silvercorp, were each falling 10%. Dollar prices for platinum, palladium and silver metals moved to 12-month lows as the waves of selling continued.

While individual commodity prices are impacted by idiosyncratic demand and supply issues, the influence of the dollar been particularly important over the past while. The dollar index, a measure of the greenback's trade-weighted value, has trundled along in a protracted bear market since early 2002, but has recently shown signs of reversing trend.

When dollar crude oil prices peaked on July 15, the dollar commenced its most recent uptrend. The primary influence on the apparent ongoing revaluation of the dollar has not been the slowed US economy, but rather the lagged slowdown in other economies, not least across the Euro zone.

In anticipation that central bankers in other countries will come increasingly under pressure to cut policy interest rates, investors have taken a shine to the dollar. In general terms, dollar commodity prices tend to move in the opposite direction to the dollar, and, allied with mounting evidence that global economic growth is further slowing, investors far and wide have runs miles from commodities, and listed resources stocks. The widely held Reuter Jefferies CRB commodity index, has stubbornly held out, but in the past few days has moved firmly into bear territory, with its correction now at 24% from the high.

Selling has also been heavily influenced by continued credit market worries, and stranded hedge, or speculative, selling. On Tuesday, financial names were falling; Lehman Brothers, a Wall Street investment bank, was down more than 30%. Tuesday's severe shake out may be seen by some as an opportunity to start bargain hunting. The Bank Credit Analyst stated in research that "oversold equity markets have considerably more upside in the wake of the quasi-nationalization of Fannie Mae and Freddie Mac", the US's two huge mortgage lenders.

BCA Research said that it was unclear yet whether and/or how quickly the US Treasury's plan would put a floor under US house prices, "but it should trigger a sustainable rally in global equity markets. Stocks are oversold and hence are poised to take advantage of better news on the US housing front.

"Market sentiment should also get a lift from the recent sharp decline in crude oil prices and signs that headline inflationary pressures are likely to abate in the months ahead. It is too soon, however, to signal an all-clear for a new equity bull market to begin".