TM: Rate Cuts By Major Central Banks Likely To Result In Volatility
(RTTNews) - If the performance of the U.S. stock index futures is any indication, stocks are likely to see considerable volatility on Wednesday on news that the U.S. Federal Reserve is undertaking a coordinated interest rate cut with the major central banks of North America and Europe. Three weeks ahead of its regularly scheduled meeting, the Fed said it lowered its target for the federal funds rate 50 basis points to 1.5 percent. The Fed attributed the move to recent evidence pointing to a weakening of economic activity as well as a reduction in inflationary pressures.
A number of other central banks announced rate cuts as well, including the Bank of Canada, the Bank of England, the European Central Bank, Sveriges Riksbank, and the Swiss National Bank. All these banks cut their benchmark rates by half a percentage point. The banks hope the rate cuts will help to ease the credit crisis that has been roiling the financial markets.
U.S. stocks opened higher on Tuesday in reaction to additional measures announced by the Fed to stem the credit crisis. The markets were unable to sustain the initial upward move, however, and stocks turned lower not long after the open. The major averages decline steadily over the course of the session and closed significantly lower.
The Dow Industrials declined 508.39 points or 5.11% to 9,447 and the Nasdaq Composite slumped 108.08 points or 5.80% to 1,755, while the S&P 500 Index receded 60.66 points or 5.74% to 996. With the downward move, the Dow and the S&P 500 set five-year closing lows, while the Nasdaq set a four-year closing low.
Among the Dow components, Bank of America (BAC | Quote | Chart | News | PowerRating) plummeted 26.23%, Citigroup (C) tumbled 12.98% and JP Morgan Chase (JPM | Quote | Chart | News | PowerRating) fell 10.64%. American Express declined 6.05%, while Alcoa (AA | Quote | Chart | News | PowerRating) shed 7.73% ahead of its earnings. General Motors (GM | Quote | Chart | News | PowerRating) (down 10.85%), Home Depot (HD | Quote | Chart | News | PowerRating) (down 4.08%), IBM (IBM | Quote | Chart | News | PowerRating) (down 4.94%), Intel (INTC | Quote | Chart | News | PowerRating) (down 5.38%), 3M Co. (MMM | Quote | Chart | News | PowerRating) (down 4.81%), Microsoft (MSFT | Quote | Chart | News | PowerRating) (down 6.74%), Pfizer (PFE | Quote | Chart | News | PowerRating) (down 6.81%), United Technologies (UTX | Quote | Chart | News | PowerRating) (down 4.81%) and Wal-Mart Stores (WMT | Quote | Chart | News | PowerRating) (down 5.28%) were among the other Dow components that posted notable losses.
Financial stocks were the worst hit, with the Amex Securities Broker/Dealer Index tumbling 8.98% and the KBW Bank Index receding 10.66%. The Dow Jones Transportation fell 4.96% compared to a 3.18% decline by the Dow Jones Utility Average. The Amex Airline Index slumped 15.63%, while the Amex Oil Index and the Philadelphia Oil Service Sector Index lost 6.12% and 8.44%, respectively. The S&P Retail Index fell 6.18% compared to a 7.37% drop by the Philadelphia Housing Sector Index. Technology stocks also came under significant selling pressure, with the Philadelphia Semiconductor Index declining 4%.
The Amex Securities Broker/Dealer Index has lost about 62% from its mid-2007 peak of 267.69 and is trading at 101.81. Signaling extreme bearishness, the index has had four consecutive down days, forming a long-bodied red candle each day. The index has downside support around 86.63, which may serve as a near-term bottom. On the upside, the index may have difficulty breaking through resistance levels around 112.85 and 150.
Currency, Commodity Markets
Crude oil futures have shown significant volatility in early trading and are currently trading down $1.49 at $88.57 a barrel. On Tuesday, the commodity rose $2.25 to $90.06 a barrel.
Meanwhile, gold futures, which rose $15.80 to $882 an ounce in the previous session, are currently rising $33 to $915 an ounce.
On the currency front, the U.S. dollar is trading at 99.88 yen, weaker than the 101.4855 yen it was worth at the close of New York trading on Tuesday. The dollar is currently valued at $1.3658 versus the euro.
Asia
The major Asian markets showed substantial weakness on Wednesday in reaction to the mayhem on Wall Street overnight, which saw the key indexes drop about 5% each. Oil showed weakness in Asian trading, while gold futures were trading higher following the weakening of the dollar.
Japan's Nikkei 225 average opened lower and declined steadily throughout the session to end significantly lower. The index ended down 952.58 points or 9.38% at a 5-year low of 9,203. Stocks declined across the board.
Toyota Motor fell 11.59% after the Nikkei reported that Toyota might miss its profit forecast for the full year. Advantest, Clarion, Fujikura, Furukawa, Hitachi, Nippon Soda, NITTO Boseki, Tokai Carbon and UBE Industries were among the other notable decliners.
The Australian All Ordinaries Index, which saw significant strength in the previous session on the back of an interest rate cut by Australia's central bank, opened unchanged and declined sharply in early trading. Thereafter, the index moved sideways before closing near the lows of the session. The index ended down 228.10 points or 4.96%.
Energy and material stocks came under significant selling pressure on a day that saw broad based weakness. Financial, retail, media, and mining stocks also receded sharply during the session.
South Korea's Kospi gap-opened significantly lower and moved sideways till the afternoon, when selling pressure intensified. The index saw further downside before ending the session down 79.41 points or 5.81% at 1,287.
Large caps lost ground across the board, led by heavy machinery and steel stocks. Doosan Heavy Industries plunged 15% and POSCO fell 5.9%. Tech exporters and financials also fell sharply. Hynix Semiconductor tumbled 14.9% and flat panel giant LG Display slumped 10.1%. Shinhan Financial Group plummeted 8.3%.
The Chinese stock market closed sharply lower for the third straight trading session, led by financial stocks, amid escalating fears over the global credit crisis. The benchmark Shanghai Composite Index closed down 65.62 points or 3.04% at 2,092.22. The index has fallen nearly 202 points or about 8.8% in the first three trading days of this month.
Among banks, China Merchants Bank plunged 8.3%, China Construction Bank fell 5.4%, and Industrial and Commercial Bank of China dropped 2.2%. Elsewhere in the financial sector, Ping An Insurance tumbled 9.2% and China Life Insurance plummeted 9.1%.
Significant weakness was also visible in the Hong Kong stock market, with the Hang Seng index finishing at its weakest level in nearly 28 months. The Hang Seng index closed down 1,372.03 points or 8.17% at the day's low of 15,431.73.
Chinese financials and local banks lost ground even though the Hong Kong Monetary Authority cut its lending rate through its discount window facility.
Europe
After seeing notable weakness in early trading, the major European markets are currently seeing significant volatility on the news of the rate cuts. The U.K.'s FTSE 100 index is currently down 0.8%, while the French CAC 40 index is down 1.3% and the German DAX index is down 1.8%.
U.S. Economic Reports
Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 AM ET on Wednesday. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale. The consensus expectations call for a 1.2% decline in the index for August.
The pending home sales index declined 3.2% on a monthly basis in July compared to a 5.8% increase in the previous month. Lehman Brothers believes that the leveling off in existing home sales is being driven by an increase in foreclosure sales. Additionally, the firm is of the view that lower prices have brought some bargain hunters into the market. Overall, Lehman is of the view that the housing market is still very much out of balance with a huge excess of homes on the market for sale.
The Energy Information Administration is also due to release its weekly oil inventory report at 10:30 AM ET on Wednesday.
Crude oil stockpiles rose by 4.3 million barrels in the week ended September 26th to 294.5 million barrels. Crude oil inventories are now in the lower half of the average range for this time of the year.
Gasoline inventories rose by 0.9 million, while distillate stockpiles fell by 2.3 million barrels. Refinery capacity utilization averaged 73.7% in the four-weeks ended September 26th compared to 77.8% in the previous week.
Stocks in Focus
Alcoa (AA | Quote | Chart | News | PowerRating) may see some weakness after it said its third quarter earnings declined to 33 cents per share from 63 cents per share in the year-ago period. The year-ago results included a net gain of 25 cents per share from the company's investment from Chalco, while the recent quarter included a charge of 4 cents per share. Revenues eased 2% to $7.23 billion.
Brocade Communications Systems (BRCD | Quote | Chart | News | PowerRating) rose in Tuesday's session after it said it has entered into a $1.2 billion secured credit facility with Bank of America (BAC | Quote | Chart | News | PowerRating) to finance its acquisition of Foundry Networks
Sealy Corp. (ZZ | Quote | Chart | News | PowerRating) may react to its announcement that its third quarter earnings declined to 12 cents per share from 22 cents per share last year. Revenues fell 9% to $405 million. Analysts, on average, estimated earnings of 8 cents per share on revenues of $389.8 million.
Yum (YUM | Quote | Chart | News | PowerRating) could gain ground after it said its third quarter earnings rose to 58 cents per share from 50 cents per share last year, as revenues rose 11% to $2.8 billion. The consensus estimates had called for earnings of 54 cents per share on revenues of $2.78 billion.
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