The JSE was looking for an excuse to fall, say market commentators, and on Tuesday, world conditions helped it do just that. Though some investors would have been squeezed out, others saw it as an opportunity to buy cheaper stocks. The local market closed at 26 078,30 on Tuesday, and lost another 1% on Wednesday, to end at 25 796.
Andrew Todd, a derivatives trader at BoE Stockbrokers, said the JSE’s drop was sparked by a fall in Chinese markets and the news that the United States might enter a recession by the end of the year. “People were looking for a reason to take money off the table,” he added. “We’ve been saying that there is no value around and that we’re expecting a correction. Those elements [China and US fears] provided the perfect recipe. We rebounded off lows today, which does indicate that buyers are willing to come in at lower levels, but I wouldn’t say we’re out of the woods yet. There’s still a lot of nervousness around … I’d like to see a good strong performance from the Dow.”
Todd said in some ways Tuesday’s plunge came as a welcome relief, allowing cash sitting on the sidelines to be put to work at better levels. The next day, Wednesday, the JSE was down 550 points at one stage but by the end of the day was only down 230 points, showing that recovery was possible. According to Todd, derivatives players, who are highly geared, could have been squeezed out of the market, resulting in initial panic selling.
“It was expected, but people keep on buying anyway. It was insane, the market was high and it kept on going higher,” said Peter Major of Cadiz, referring to the JSE’s record performance shortly before the correction. “There was no sign of anything that could bring it down. But you never see the catalyst.”
China’s Shanghai stock exchange fell 9% in one day on Tuesday, its biggest drop in a decade, after Beijing said it would clamp down on scam artists and fake shares, and the “hot money” left the market, said Major. In a chain reaction, other investors also took money out.
Data on US loan companies and Alan Greenspan’s comments added to the pressure, along with local news that government was considering a super tax on all resources.
“From about 10.30am, our market was under constant selling. A lot of that selling was smart, people saying look how far it’s run, maybe this is a catalyst,” Major said. “Even if China had gone flat, the US would have been down anyway. China gave people a good reason to whack it. The windfall tax would have pushed us down 1%, just for that.” The combination of events led to the local market’s correction.
Wall Street suffered its biggest one-day fall on Tuesday since the immediate aftermath of the September 11 terrorist attacks, as a day of hefty stock market falls around the world culminated in a late panic sell-off in New York.
At one stage, the savage mark-down of equities on Wall Street left the Dow down 550 points, but a partial recovery meant that at the closing bell the average of blue chip stocks finished 415,86 points lower at 12 216,40. The one-day loss more than wiped out this year’s gains on the stock market for the Dow and New York’s two other main share price indices, the S&P 500 and the Nasdaq.
Despite news this week of a modest pick-up in sales of existing homes, the mini-crash was also blamed on the exposure of the US financial sector to subprime mortgages, a high-risk form of home loan that proved lucrative when the housing market was booming. The latest figures show that the price of existing homes in the US in January was 3,1% lower than a year earlier.
Earlier, a day of turmoil on the world’s bourses from Hong Kong to Buenos Aires began with a fall of almost 9% in Shanghai. The FTSE 100 closed almost 150 points down on the day at 6 286,1 with the fall of 2,31% the sharpest since last June. The FTSE 250 suffered its biggest one-day points fall, dropping by 431.5 to 11 180,9. The Nikkei dropped 0.52% to 18 119,92 after the yen’s strength gave investors a reason to sell some exporters’ shares. The FTSEurofirst 300, the pan-European index, dropped 2,8% to close unofficially at 1 507,06, its biggest one-day percentage loss since May 2003.