Futures markets are pointing to a slightly more bullish start to the trading week following the removal of co-president, Warren Spector, at Bear Stearns (BSC). The resident mortgage and trading king at the investment king had apparently lost the confidence of the board of directors and his CEO, James Cayne. The two had become long-time bridge buddies. Having upset fellow Wall Street investment banks with his roughshod approach in response to hemorrhaging at internal mortgage related hedge funds, Spector’s role had become untenable. Shares at Bear Stearns have plunged 27% in 2007 and the rest of the sector is suffering its own brand of contagion. No matter which way you look at it for Bear, despite the removal of Spector, there’s no denying the fact that they can’t change the hand they’ve been dealt. The futures contract on the S&P 500 contract trading .32 points above fair market value at 1,453.50. The Nasdaq 100 futures contract is trading .28 points above fair market value at 1,951.75. The Dow Jones Industrial Average future is trading .26 points above fair market value at 13,338.74.
Elsewhere Asian markets suffered losses overnight in reaction to Friday’s miserable performance in the U.S. However, Japan’s Nikkei bounced well off its low to close with minimal damage of a decline of just 0.4%. The Chinese market took a look to the downside before rallying to a fresh record peak as earnings related optimism shone through. Most markets in the region bounced sharply from their lows and settled with modest losses. As Wall Street awakens, European shares are also turning from red to the black as investors wonder whether the market isn’t due for a bounce.
With the price of oil futures slipping to less than $74 per barrel in the early session, there’s a sense of calm returning to investors’ minds. The easing of inflationary pressures could yet be the tonic this market needs. Last week the CBOE so-called “fear-gauge” or volatility index settled above 20 for the first time since the index was accustomed to trading above that value on a daily basis following the market crash in 2000. The run matches volatility in September 2003, but barring a caving of investor psychology in Monday’s session today will likely break that four-year old run of peak closes for the VIX. So we can expect the markets to hop more violently than a frog in the cuisine at a top Parisian hotel for some time to come.
An unintended consequence of the stock market turmoil is also filtering through to the currency markets where the so-called “carry trade” is going out of fashion. As investors pull assets out of overseas stock markets whose local currency values have been given the added boost from currency strength against the U.S. dollar, those same currencies are easing back. The Japanese yen and Swiss franc – two favored whipping boys for carry plays – are back on the rise again with the yen rising to $117.50. The euro is also back in favor with investors as traders have the recent record-high back in their sites. With the euro trading at $1.3818 Monday morning, that peak at $1.3853 isn’t far away at all.
This week sees the Federal Open Market Committee meet to decide on whether to change U.S. interest rate policy. There is little chance of any change but we’ll all be looking for any change to the wording of the accompanying statement that refers to the fallout from the subprime lending debacle and whether policy-makers choose to display any care at this juncture.
European markets are trading mostly lower at this writing, though Germany’s DAX is clinging to a quarter-percentage point gain on the day at first dispatch, currently at 7,454.20. The UK FTSE 100 is also up 0.22% at 6,238.00. France’s CAC 40 is down half a percent, with full percent declines for regional benchmarks in Russia, Norway and Sweden.
Telecom stocks have been in focus on Germany’s Eurex exchange, three days before Deutsche Telekom AG (DTE), Europe’s largest telecom, is due to report Q2 earnings. With consensus ahead of Thursday’s before-the-bell release pointing to a fifth consecutive quarterly loss in profits and earnings, options traders dealt heavily in the August 12.50 EUR puts, where 10,300 lots traded against existing open interest. With Deutsche Telekom shares currently trading at EUR 12.62, some of the put activity trading to the middle of the market in the August 12.50’s may be indicative of traders taking premium ahead of earnings – with underlying shares trading at EUR 12.62, the face price of the contract stands at .19%, an appreciation of 50% from two weeks ago.
Elsewhere on the Eurex, Siemens (SIE) traded heavily to the call side in the December EUR 96 contracts. Alcatel Lucent (CGE) lodged traffic of 7,000 lots in the broad-spanning December ’11 puts at the EUR 7.20 strike. Telecom Italia (TQI) also traded heavily to the put side on the Eurex, with 3,100 lots going through in the December ’11 series, at the EUR 1.60 strike.
Rebecca Engmann Darst
Equity options analyst/Financial Writer
(203) 618-5988
