| LastUpdated 10/13/2008 9:23:13 AM
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Stocks May Respond to Central Bank, Government Measures
The major U.S. index futures are pointing to a notably higher opening on Monday. The Federal Reserve announced today additional measures to shore up liquidity, which would help the conduct of unlimited dollar fund auctions of maturities of 7 days, 27 days and 84 days by the ECB, the Bank of England and the Swiss National Bank at a fixed interest rate. The latest announcement along with the other measures announced by the central banks and governments of various nations should serve to alleviate concerns over a liquidity crunch. Credit spreads have also narrowed from record high levels in response to these measures.
U.S. markets experienced a rout in the week ended October 10th despite government and central bank actions to bolster liquidity and build confidence. Traders remained fixated on their pessimistic stance, as they sold off holdings without discretion. The major averages did not show even a wee-bit of optimism over the $700 billion rescue package passed by Congress and signed into a law by the President in the previous week, as they declined sharply on Monday.
On Tuesday, the markets declined again, with the Dow Industrials dropping over 500 points, even after the Fed announced a couple of measures, including its intention to buy commercial paper. The selling pressure continued unabated on Wednesday, even as major central banks announced coordinated interest rate reductions. Notwithstanding a positive pre-announcement from IBM (IBM), the major averages declined sharply on Thursday, extending their losses for the seventh straight session. On Friday, the major averages ended on a mixed note, with the Nasdaq Composite Index bucking the downtrend.
During the week, the Dow declined 18.15% and the S&P 500 Index fell 18.20%, while the Nasdaq Composite ended the week down 15.30%.
Among the sector indexes, the Amex Securities Broker/Dealer Index and the KBW Bank Index declined 25.6% and 21.69%, respectively for the week. The Amex Oil Index and the Philadelphia Oil Service Sector Index posted weekly losses of 21.69% and 29.79%, respectively, while the Amex Gold Bugs Index fell a more modest 7.79%.
While the S&P Retail Index lost 17.31% during the week, the Philadelphia Housing Sector Index declined 15.35%. The Dow Jones Utility Average and the Amex Airline Index tumbled over 20% each and the Philadelphia Semiconductor Index ended the week down 13.57%.
Currency, Commodity Markets
Crude oil futures are recovering and are currently trading up $3.61 at $81.31 a barrel after the commodity came under significant selling pressure in the week ended October 10th. A barrel of oil tumbled $16.18 or 17.23% to $77.70 a barrel in the previous week.
Gold futures are currently receding $0.90 to $858.10 an ounce. Last week, the precious metal rose $25 to $859 an ounce.
Among the currencies, the dollar a showed mixed performance in the week ended October 10th. The greenback lost 4.41% against the yen to 100.67 yen, as investors wary of the heightened risk arising from the credit crisis unwound carry traders, thereby resulting in the strengthening of the yen. However, the dollar gained 2.63% against the euro to $1. 3410 a euro, as bank failures and bailouts spread to Europe.
Currently, the dollar is trading at 100.195 yen and is worth 1.3652 versus the euro.
Asia
The major Asian markets mostly advanced in Monday’s session, with the positive sentiment arising out of reassuring actions and comments from the respective governments. The Japanese market remained closed on account of a public holiday.
South Korea’s Kospi opened notably higher, but it began a steady decline until the mid-session before reemergence of buying interest lifted the index in the afternoon. The index closed near the highs at 1,289, representing a gain of 47.06 points or 3.79%.
Most sectors, barring insurance stocks, advanced, with particularly strong buying interest found among medicine & precision, machinery, electric & electronics and machinery stocks. In the big cap space, Woori Financial and KEPCO rose over 10%. However, Samsung Fire & Insurance, Hyundai Mobils and LG Electronics receded.
Australia’s All Ordinaries opened unchanged and rose sharply in early trading. Thereafter, the buying momentum subsided and the index moved sideways. The index closed up 202.40 points or 5.14% at 4,142.
The market witnessed broad based buying interest, with energy, financial, REIT, healthcare and material stocks showing significant strength. Among resource stocks, BHP Billiton, Newcrest Mining and Rio Tinto rose sharply, while Alumina and Woodside Petroleum posted modest losses. Financial stocks AMP, ANZ Bank, AXA Asia, Commonwealth Bank, National Australia Bank, QBE Insurance and Westpac advanced strongly.
After holding close to the unchanged line in the morning, Hong Kong’s Hang Seng Index rose strongly thereafter. The index ended up 1,515.29 points or 10.24% at 16,312. All forty two index components ended the session higher.
Europe
The major European markets are trading higher on Monday after the European government agreed to underwrite inter-bank lending. The French CAC 40 Index and the German DAX Index are rising 6.07% and 7.20%, respectively, while the U.K.’s FTSE 100 Index is advancing 3.88%.
A report released by the Bank of France showed that the French current account deficit widened to 4.2 billion euros in August from 3.6 billion euros in July. Meanwhile, the U.K.’s Office of National Statistics showed that output prices fell 0.3% on a seasonally unadjusted basis in September, dragged down by softness in petroleum and scrap metal prices. On a year-over-year basis, output prices climbed 8.5%. Meanwhile, the input price index fell a seasonally unadjusted 1.3% compared to the previous month and was up 5.4% from last year.
U.S. Economic Reports
Traders are likely to focus primarily on the Labor Department's consumer and producer price reports for September, the Commerce Department's retail sales report and the Federal Reserve's industrial production report.
Additionally, the results of the October manufacturing surveys of the New York Federal Reserve and the Philadelphia Fed, the housing starts report for September, the National Association of Homebuilders' housing market index and the University of Michigan's consumer sentiment survey may also be in the spotlight. Market participants could also attach some significance to the regularly scheduled weekly oil inventory and jobless claims reports and the Commerce Department's business inventories report for August.
Producer prices are likely to have declined, although the core reading is expected to show growth. Falling food and energy prices could keep the headline inflation rate in check for the second straight month. Barclays believes that input cost pressures over the past year are likely to continue to make their way through the supply chain in the near future, suggesting that a more significant decline in core goods inflation is several months off.
Meanwhile, consumer price inflation is likely to have remained tame due to the decline in energy prices. However, the core prices are likely to reflect the lagged effects of past increases in commodity and import prices. One can expect a cooling in the core inflation rate due to the fact that firms have been lowering prices in-line with sagging demand.
Reflecting a broad based decline in the output of the manufacturing sector, industrial production for August is expected to show a drop. The assumption is based on the fact that the ISM's manufacturing index moved sharply into recession territory in the past month. Mining output may be hurt by hurricane-related disruption to refineries.
Housing starts are likely to have remained flat in September due to a drop in single-family starts. A drop in sales could leave builders contending with excess inventories. Therefore, it is unlikely that housing starts will recover any time soon.
Stocks in Focus
Wachovia (WB) and Wells Fargo (WFC) are likely to be in focus after the Fed approved the latter’s takeover of Wachovia for $11.7 billion. The announcement came following the withdrawal of Citigroup (C) from the fray.
Qimonda (QI) could react to its announcement that it has agreed to sell its 35.6% stake in Inotera Memories, in which Qimonda and Nanya Technology hold stakes, to Micron Technologies (MU) for $400 million. The company also said it plans to ramp down manufacturing at its 200mm facility in Richmond by January 2009, marking its exit from 200mm production. Additionally, the company also plans to shut down its back-end component and module manufacturing in Dresden, Germany by March 2009. Due to these actions, the company expects to eliminate about 3,000 jobs. Separately, the company announced the resignation of its CFO Michael Majerus.
Sovereign Bancorp. (SOV) may react to reports that the bank may be taken over by Banco Santander for roughly around $3.81 per share, which is the bank’s closing price on Friday. The Spanish bank already holds about 24.9% stake in Sovereign Bancorp.
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