The major U.S. index futures are pointing to a lower opening on Wednesday. Notwithstanding the Fed's helping hands, investors are likely apprehensive over the fate of AIG (AIG). Additionally, markets could also be unnerved by the continuing bleak readings on the housing front following the release of a worse-than-expected housing starts report and a resumption in the climb of oil prices.
Although U.S. stocks opened Tuesday's session sharply lower, they showed some volatility over the course of trading, thereby trimming the early losses. After dipping sharply immediately after the announcement of the Fed's decision to maintain interest rates unchanged, they rose sharply to end higher. The Dow Industrials climbed 141.51 points or 1.30% to 11,059.
While the Nasdaq Composite Index rose 27.99 points or 1.28% to 2,208, the S&P 500 Index gained 20.89 points or 1.75% to 1,214.
Bank of America (BAC) led the Dow's gains with an 11.30% advance, while peer JP Morgan Chase (JPM) gained 10.11%. Hewlett-Packard (HPQ) surged up 6.79% in reaction to the job cuts announced by the company. Citigroup (C), Caterpillar (CAT), Chevron (CVX), DuPont (DD), 3M Co. (MMM) and Exxon Mobil (XOM) also showed significant strength. On the other hand, AIG (AIG) slumped 21.22% and General Motors (GM) declined 5.24%. Home Depot (HD) and Microsoft (MSFT) lost over 1% each.
Among the sectors, the Amex Securities Broker/Dealer Index and the KBW Bank Index rallied 4.17% and 7.27%, respectively. The Amex Oil Index rose 2.58% compared to a 3.94% advance by the Philadelphia Oil Service Sector Index, while the Amex Gold Bugs Index rose 1.61%. Airline stocks benefited from a steep decline in oil prices, with the Amex Airline Index jumping 11.45%. Transportation, utility retail, housing, biotechnology, semiconductor, software, networking and Internet stocks also advanced.
The market mayhem triggered by Lehman's bankruptcy filing has seen the Dow decline sharply on Monday, taking the loss for the year-to-date period to about 17% or 2,347 points to 10,918 as of Monday before it trimmed some of its losses on Tuesday. The volume that accompanied the downside was pretty heavy, causing further anxiety to traders.
After trading in a range between its mid-January lows of 11,621 and its mid-July lows of 10,827 for about two months, the index broke below the support level on Tuesday before moving back into the range. On the upside, the index is likely to face resistance at its 50-day moving average, which is currently at 11,408.
At its September meeting, the Fed opted to leave its target for the fed funds rate unchanged at 2%. The discount rate was also maintained at 2.25%. In the post-meeting policy statement, the Federal Open Market Committee highlighted the financial market risks by giving priority to its reference to the issue. The Fed said, "Strains in financial markets have increased significantly and labor markets have weakened further."
The Fed acknowledged that economic growth slowed due to softening household spending, a deviation from the August statement, where it said, "Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports." Along with tight credit conditions and the ongoing housing contraction, the Fed noted that slowing export growth would weigh on economic growth over the next few quarters. In August, the central bank had alluded to elevated energy prices as one of the risks to growth.
The Fed repeated its rhetoric on inflation, while it left out the sentence that said the Committee expects inflation to moderate later this year and next year.
According to economists at Commerce Bank, the Fed may have been forced to stay put for two reasons. The central bank may have been restrained due to the fact that an interest rate reduction would only have served to increase the liquidity, while doing little to increase the willingness to lend. In the current economic milieu, liquidity does not seem to be the issue, but the willingness to lend. Additionally, a token 25 basis point reduction would not have gone well with the market participants. Therefore, the central bank would have had to cut interest rates by 50 basis points or 1%. If the Fed chose the second option, then it would have used up what limited rate ammunition it has left.
Among the economic reports released yesterday, the Labor Department said consumer prices fell 0.1% in August, but core consumer prices rose 0.2%. The drop in the headline inflation rate marked the first drop since October 2006. The readings were exactly in-line with expectations. The year-over-year rate of consumer price inflation was 5.4%, down from 5.6% in the previous month. Meanwhile, net foreign purchases of U.S. long-term securities declined for the third consecutive month to $6.1 billion in July, according to a report by the U.S. Treasury.
Financial System on Verge of Nationalization?
The Fed announced late Wednesday that it is authorizing the Federal Reserve Bank of New York to lend up to $85 billion to AIG. The financing is being done with the objective of assisting the insurer in meeting its obligations as they come due, and it is expected to facilitate the sale of certain of its businesses in an orderly manner, with the least possible disruptions to the overall economy. The loan facility extended to AIG has a 24-month term, with interest chargeable at a rate of three month LIBOR plus 850 basis points. In return, the government gets a 79.9% equity stake in AIG and the right to veto the payment of dividends to common and preferred shareholders.
The move follows close on the heels of the government bailout of Freddie Mac (FRE) and Fannie Mae (FNM). In 2007, the Fed assisted JP Morgan's takeover of Bear Stearns. Although the Fed did not volunteer to bailout Lehman Brothers, it was passively involved in persuading firms to takeover the firm. All these suggest that the dividing line between government-ownership and private-ownership is blurring, which in other words is unveiling an era of nationalization of at least the financial sector.
Three of the five major investment banks have gone under. At this juncture, is the government intervention justifiable? Any move towards nationalization would have to come at the expense of the taxpayer, who will be forced to absorb the losses from the crisis.
Currency, Commodity Markets
Crude oil futures are currently trading up $3.55 at $94.70 a barrel after the commodity fell $4.56 to $91.15 on Tuesday. Meanwhile, gold futures, which declined $6.50 to $780.50 an ounce on Tuesday, are currently advancing $7.50 to $788 an ounce.
On the currency front, the dollar is reversing some of the gains it posted in Wednesday's session. A dollar is currently worth 105.35 yen, stronger than the 105.6615 yen it fetched on Tuesday. Against the euro, the dollar is valued at $1.4175.
Asia
Stock markets across the Asia-Pacific region closed mixed on Wednesday after a firm start. The relief rally fizzled out as lingering concerns about the banking sector weighed on the stock markets in Australia, China, Hong Kong and Singapore. Crude oil futures were higher in late Asian trade, rebounding from a seven-month low reached on Tuesday. In late Asian deals, oil was quoted at $93.83 a barrel.
Asian financial stocks fell, as a U.S. bailout of AIG failed to ease concerns that credit-related losses will cause more financial failures. Macquarie Group slumped in Sydney, despite denying a newspaper report that it might face difficulty in refinancing debt.
Japan's Nikkei 225 average gap-opened higher and rose further in early trading. Thereafter, the index pared back some of its gains to close up 140.07 points or 1.21% at 11,750.
In a widely expected move, the Bank of Japan left its overnight call rate target unchanged at 0.5% by a unanimous vote and maintained its assessment of the economy, which it said was still sluggish.
Insurance stocks rose, boosted by optimism over the AIG rescue plan. Tokio Marine Holdings surged 5.0%, Sompo Japan Insurance gained 2.1% and Mitsui Sumitomo Insurance Group advanced 0.3%. Exporters were mixed despite the dollar's gains against the yen.
Banks finished mixed, with Mizuho Financial Group dropping 0.7%, Mitsubishi UFJ Financial Group rising 1.3%, and Sumitomo Mitsui Financial Group climbing 0.7%. Brokerages showed weakness, while technology stocks found some degree of buying interest.
The South Korean Kospi opened higher and moved mostly sideways before closing up 37.51 points, or 2.7%, at 1,425. In the tech sector, LG Electronics jumped 5.8% and LG Display surged 5.0%. Market heavyweight Samsung Electronics closed unchanged after SanDisk rejected a publicly announced bid price from Samsung to acquire the U.S. flash memory maker.
Brokerages posted sharp gains following heavy losses on Tuesday. Other major gainers included Hyundai Heavy Industries 10.4% and Hanjin Shipping 8.0%.
The Chinese market closed sharply lower for the second straight session after China Merchants Bank announced a large exposure to Lehman Brothers. The benchmark Shanghai Composite Index closed down 57.59 points or 2.90% at 1,929.
Hong Kong's Hang Seng Index ignored a positive opening and receded into negative territory within the first hour of trading. The index moved steadily lower before closing down 663.42 points or 3.63% at the day's low of 17,637.
The Hong Kong market fell for the sixth straight session, as Chinese banks fell on concerns about narrowed interest-rate spreads and worries about their exposure to the troubled U.S. financial institutions. China Merchants Bank tumbled over 7%, ICBC plunged nearly 10% and China Construction Bank lost 8%. Among local banks, market heavyweight HSBC shed nearly 2.5%.
Australia's All Ordinaries opened unchanged and saw some strength in early trading. However, the index reversed course, moving into negative territory in the afternoon.
The All Ordinaries index dropped 30.1 points or 0.6% to finish at 4,847.
Australia's big insurers finished mixed after they said that they have no or minimal exposure to AIG. Among major banks, National Australia Bank plunged 5.5%, Westpac lost 1.1%, ANZ fell 2.2% and Commonwealth Bank declined 1.4%. Investment bank Macquarie Group slumped 7.8% despite saying that it remained well funded and capitalized.
In the resources sector, global miner BHP Billiton dropped 2.1% and rival and takeover target Rio Tinto plummeted 4.5%. Oil and gas producer Woodside Petroleum rose 1.4%, and Santos advanced 1.5%, while Oil Search jumped 3.0%. Among gold miners, Newcrest Mining slipped 0.2%, but Lihir Gold surged 8.6%.
Europe
The major European markets are trading on a mixed note. The French CAC 40 Index and the German DAX Index are trading up 0.73% and 0.12%, respectively, while the U.K.'s FTSE 100 Index is receding 2.68%. In the U.K., mortgage lender HBOS is receding sharply.
On the economic front, the Bank of England released the minutes of its September meeting, showing that the Monetary Policy Committee members voted 8-1 to retain interest rates at 5%, with David Blanchflower voting for a 50 basis point cut in interest rates. The minutes suggested that the committee members believed a case could be made for raising rates but decided not to, as there was no evidence that expectations on inflation in the medium term had changed.
Meanwhile, the UK's Office of National Statistical Office said U.K. claimant count was 2.8% in August, a 0.1 percentage point increase from the previous month. The number of individuals claiming jobseeker's allowance rose 32,500 to 904,900. Economists had expected a claimant count of 2.8% and the change in the jobless claims to be 22,500.
A report released by Eurostat showed that the euro area's trade deficit was 2.3 billion euros in July compared to a surplus of 5 billion euros in July 2007. In June 2008, the trade deficit was 0.2 billion euros. Construction output in the euro area edged up by 0.1% month-over-month in July, according to another report released by Eurostat. On a year-over-year basis, output was down 3.3%.
U.S. Economic Reports
A Commerce Department report showed that housing starts fell 6.2% in August to a seasonally adjusted annual rate of 895,000 from a revised rate of 954,000 for July. Economists had estimated housing starts to come in at an annual rate of 905,000 units.
On a year-over-year basis, housing starts declined 33.1%. Building permits, a leading indicator to housing starts, fell at a monthly rate of 8.9%, and were down at a year-over-year rate of 36.4% to 854,000.
The Bureau of Economic Analysis said that the U.S. current account deficit increased to $183.1 billion in the second quarter from $175.6 billion in the first quarter. The increase was due to a decrease in the surplus on income and an increase in the deficit on goods.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday.
The weekly petroleum inventory report for the week ended September 5th showed a 5.9-million barrel drop in crude oil stockpiles to 298 million barrels. Inventories are now in the lower half of the average range for this time of the year.
Distillate fuel inventories fell by 1.2 million barrels and are now in the middle of the average range for this time of the year. Meanwhile, motor gasoline inventories declined by 6.5 million barrels. Refinery capacity utilization averaged 85% in the four-weeks ended September 5th compared to 86.9% last week.
Stocks in Focus
Morgan Stanley (MS) rallied in Tuesday's after hours session after it reported that its third quarter earnings declined to $1.32 per share from $1.44 per share last year, as revenues rose to $8.05 billion from $7.96 billion in the year-ago period. Analysts estimated earnings of 78 cents per share on revenues of $6.32 billion.
Barclays (BCS) is likely to be in focus after it announced an agreement to buy Lehman's (LEH) North American investment banking and capital, market businesses for $1.75 billion. Barclays also gains possession of Lehman's New York headquarters.
Citigroup is also likely to be in focus over its announcement that its exposure to Lehman is modest and is being actively managed in an orderly fashion. Meanwhile, Wachovia Securities (WB) could react to its announcement of the appointment of JP Morgan Chase (JPM) executive Kenneth Phelan as its Chief Risk Officer.
Darden Restaurants (DRI) may trade higher after it said it expects full year earnings per share from continuing operation to grow by 5%-10% and full year sales by 12%-13%. The company also reported that its first quarter earnings declined to 58 cents per share from 72 cents per share last year. Excluding charges, the company reported earnings of 61 cents per share, in-line with the consensus estimate. Revenues rose 21% to $1.77 billion, exceeding the $1.76 billion consensus estimate.
McClatchy (MNI) declined in Wednesday's after hours session after it said it expects to trim 10% of its workforce. The company expects to save $100 million next year due to the job cuts and other restructuring initiatives. The company also said its advertising revenues fell 18% year-over-year in August.
Adobe Systems (ADBE) could also gain ground after it reported that its third quarter earnings rose a penny to 35 cents per share, although net income declined to $192 million from $205 million in the year-ago period. On an adjusted basis, the company's earnings were 50 cents per share, above the consensus estimate of 46 cents per share. Revenues rose 4% to $887 million. The company estimates fourth quarter adjusted earnings of 51-53 cents per share on revenues of $925-$955 million. The consensus estimates call for earnings of 51 cents per share on revenues of $939 million.
SanDisk (SNDK) may come under selling pressure after it said its board unanimously rejected the $26 per share all cash buyout offer from South Korean electronics giant Samsung Electronics.
Nortel Networks (NT) may be in focus after it said it expects third quarter revenues of $2.3 billion, citing the economic downturn and the additional pressure on revenue due to foreign exchange impact and productivity delays. The company also announced its intention to divest its Metro Ethernet Networks business.
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