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What a day.
The Dow Jones dived by 360 points, while the dollar hit fresh lows against sterling and the euro. Meanwhile, oil clawed even closer to $100 a barrel, and gold almost hit its all-time high (though not if you adjust for inflation) of $850 an ounce.
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What's going on? Where to begin
There was a lot to worry about yesterday.
On the one hand, the US is running further into trouble. The sub-prime crisis is escalating rapidly, with investment banks expected to announce further write-offs this quarter. Morgan Stanley is set to take a $3.7bn hit in the fourth quarter, but this could go up to $6bn if all its sub-prime investments go bad, says The Telegraph. Meanwhile, the SEC (the US equivalent of the FSA) is investigating Merrill Lynch over the way it handled its sub-prime portfolio.
None of this is good news for the dollar but to rub salt in the wound, a high-ranking Chinese official, Cheng Siwei, said it would be better for China to have "a better match" between the rising euro and the falling dollar. The spectre of China shifting some of its massive currency reserves out of dollars has been hanging over the US currency for years now, but it looks like all the concerns are coming to a head at once.
Unsurprisingly, the dollar dived to a fresh 26-year low against sterling, which breached the $2.10 barrier, while it hit another record low against the euro, which went above $1.47 for the first time. Gold meanwhile hit $846 an ounce, while oil went above $98 a barrel in the US.
Of course, rising oil and rising gold tend to point in one direction inflation. And for all the talk of rampant speculation in the oil market, a rather gloomy report from the International Energy Agency yesterday confirms that supply and demand justifies the higher oil prices.
The IEA reckons that oil could hit $159 a barrel by 2030, with demand of 120m barrels a day far outstripping supply of 116m barrels a day. And this is assuming we can get supply that high it's currently just 85m barrels a day, and if you believe in the Peak Oil theory, then it's not going to go much higher than that.
In any case, Simon Derrick at Bank of New York Mellon sums up the problem succinctly: "The Fed is caught between a rock and a hard place. It can't keep rates high enough to fight inflation because of the sub-prime crisis."
Everyone knows it, and everyone believes that the Fed will ultimately choose inflation and a weak dollar over a massive recession. So the only way for the dollar is down, and the only way for gold is up.
But what about over here? Our own Bank of England makes its interest rate decision today. I imagine it will keep rates on hold we haven't seen enough evidence of an economic slowdown for the Bank to cut rates yet, and with food and fuel prices soaring, Mervyn King will be mindful of inflationary pressures in the background.
However, the UK's growth prospects are looking bleak. Another expert has decided that the housing boom's days are numbered. Credit checking group Experian reckons that house prices will rise by an average 1.2% a year over the next two years, with prices falling by 3.7% - 4% in the Midlands and by 2.8% in the South West. How they can be so sure as to include decimal points in those calculations, we don't know.
As with all the experts so far, they argue that there will be no "calamitous crash". Everyone says this - but then up until very recently, most experts were also arguing that commercial property prices would stabilise, but not fall.
However, a recent report from Capital Economics suggests that - while valuations are uncertain in such an illiquid market - commercial property prices may have fallen by as much as 10% year-on-year already.
So much for the experts.
And as our regular commentator James Ferguson has been saying for a while, buy-to-let has the potential to make this particular housing cycle far more volatile. James's argument - which makes a lot of sense to me - is that buy-to-let investors have replaced the traditional first-time buyer as the new blood on which the property market depends.
But now it's getting much harder for new buy-to-let landlords to enter the market. The Royal Institution of Chartered Surveyors said yesterday that buy-to-let is becoming a "rich man's game." A typical prospective landlord now needs a 30% deposit to meet lending criteria. Given average house prices, that means stumping up £65,600, up 500% on 2002.
With fewer buy-to-letters entering the market, and the ones who are already there either losing money on their rentals, or looking to take profits as capital growth dries up, there could well be a rush for the exits which wouldn't normally be seen when owner-occupiers dominate a market.
You can read more of James's views in our recent property roundtable, by clicking here: Are we heading for a house price crash? And if you're not already a subscriber, click here to sign up for a free three-week trial.
Turning to the wider markets
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In London, the FTSE 100 slumped 89 points to end yesterday at 6,385 as an early triple-digit drop on Wall Street - along with bad news from blue chips - hit investor sentiment. Northern Rock was the day's biggest faller, closely followed by nuclear power stock British Energy which warned of fresh problems at one of its plants. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 was down 26 points at 5,683. In Frankfurt, the DAX-30 lost 27 points to close at 7,799.
On Wall Street, the Dow Jones registered its fifth-largest one-day decline so far this year on a catalogue of market woes; the industrials index ended the day 360 points in the red, at 13,300 with General Motors leading the fall. The Nasdaq was down 76 points, at 2,784. And the broader S&P 500 was 44 points lower, at 1,475.
The fear spread to Asian markets overnight, with the Japanese Nikkei falling 325 points to close at 15,771 today. The weaker yen also played a part, sending exporters such as Honda lower. And in Hong Kong, the Hang Seng had tumbled 948 points to 28,760 at time of writing.
A lesser-than-expected drop in inventories saw the crude oil price fall back from yesterday's high of $98.62 a barrel. Crude was trading at $95.74 this morning, and Brent spot was at $93.53 in London.
Spot gold was trading at $834.90 this morning, and silver had dropped to $15.20.
In the forex markets, the pound was trading at 2.1023 against the dollar and 1.4335 against the euro this morning. And the dollar was at 0.6817 against the euro and 112.97 against the Japanese yen.
And in London this morning, phone company BT announced a 29% fall in net profit to $339m on job-cutting costs. Shares were down by as much as 3.8% in early trade.
Finally, our recommended articles for today...
Oil: it's not different this time
- As the oil price has hit new highs, the consensus amongst analysts has been that the spike can't, on its own, cause a recession. But oil doesn't have to do it on its own, says Merryn Somerset Webb. To find out why we're more vulnerable to the rising price of crude than we like to think, read: Oil: it's not different this time
A new way to invest in this gas-rich Gulf state
- Qatar's energy minister has declared himself 'unhappy and disappointed' with the failure of natural gas to match oil's stellar gains. Yet even if the price of its principle export doesn't budge, Qatar still has plenty going for it. Garry White looks at a new way to gain exposure: A new way to invest in this gas-rich Gulf state
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House prices rise 2.9% – will the recovery continue?House prices grew by 2.9% on an annual basis in September. Will Budget policies and ‘higher-for-longer’ rates dent the recovery?
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Nvidia earnings: what to expectNvidia announces earnings after market close on 20 November. What should investors expect from the semiconductor giant?
