The opening salvo
This is going to be a helluva year. The first business day of 2008 made it quite clear that neither the economies nor the markets were going to tolerate wishful thinking, denial or even extended vacations. If you were still getting over the hangover from that New Year’s Eve party, or just taking an extra day off to get over the traumas of 2007 and ready yourself for the travails of 2008, you missed it. But since this was probably just a promo, you might as well settle down for the full-length feature.
The day began with the UK manufacturing PMI. For the uninitiated, the purchasing managers’ index is a survey of company managers conducted monthly, regarding production, sales, prices, employment and other variables, in which the respondents say whether the variable in question is rising or falling, by much or a little. No hard numbers, just direction. The index is constructed such that 50 is the border between expansion (above 50) or contraction (below 50). These surveys are now conducted in most countries, and are often split between the manufacturing and service sectors. They are very timely, being published early each month with the results of the survey of the previous month. For that reason, they are widely followed and considered very useful and important.For the UK, the PMI had been expected to register another small decline, from 54.3 in November to around 53.5. In fact, it fell to 52.9 – not a major disaster, but enough to give sterling, which has been weak for weeks, another gentle shove down the slope against the euro and other currencies. It even fell against the dollar. But the real fun came later in the day, when the Americans got back to work.
The US manufacturing PMI was published at 8.30am, New York time – before the American markets opened. It, too, had been expected to extend its recent downward trend, to around 50.5 – perilously close to the critical level. But the actual datum was a horrendous 47.7. When the markets are feeling happy, the analysts can say that this is only a single month, it’s not conclusive, it’s only manufacturing, and make any other excuse that comes to mind. But when the markets are not happy – and when the price of oil is jumping again, because of supply problems in Mexico and murderous mayhem in Nigeria – then excuses are not accepted, prisoners are not taken and instead, everyone runs for cover.
So: the share markets sold off immediately and ended the day down by 1.5% or more; Treasury bonds, on the other hand, soared upwards. The dollar sold off against virtually every currency on earth (except sterling), but especially against the main havens of safety, the yen and the Swiss franc. Oil touched $100 a barrel for the first time, making new record highs, and soybeans also climbed to new record highs, as part of a renewed surge in commodity prices. But all that paled compared to the action in gold.
Gold ended 2007 around $832 an ounce, just below its peak for the year of $838 and within sight of the all-time high of $850, dating from 1980. The pundits were saying that it would surely go higher, but breaking through the 850 level would be tough. In the event it took about half an hour – because the bad news on the economy, the renewed fall in the dollar and the new flood of money into commodities sent the price of gold up like a rocket. At the close of trading, spot gold was about 858 and it rose further on Thursday in Asia and Europe.
It is conceivable, of course, that all this was merely a finale to the trends that dominated 2007. But it is far, far more likely that it represents a prologue and a preamble to what lies ahead in 2008. The state of the dollar is a good example. No-one wants to hold it and dollar interest rates are set to fall further, making it ever more unattractive. On the other hand, few people are crazy about the euro as an alternative, for a whole range of reasons. The Swiss franc is a substitute for the euro, but only up to a point. The sad truth is that none of the major currencies are terribly attractive and, to make matters worse, inflation is rising. That is sending more and more money in the direction of gold – so that a four-digit price tag is almost a foregone conclusion.