Late Rally Lifts S&P 500 by 4.8%; Fed Lowers Economic View

Bikram Pandey
09 Aug, 2011
New York City

U.S. stocks bounced between gains and losses of 2% or more after the Fed held its key lending rate and guided low rates till mid-2013 and did not announce new measures to lift economic growth. Gold traded above platinum for the first time in three years. AOL Inc plunged 30% to a record low.

[R]4:10 PM New York – U.S. stocks bounced between gains and losses of 2% or more after the Fed held its key lending rate and guided low rates till mid-2013 and did not announce new measures to lift economic growth. Gold traded above platinum for the first time in three years. AOL Inc plunged 25%.[/R]

U.S. stocks were buoyant in the day and indexes soared as much as 3.5% but fell into a tailspin after the Fed issued a weak statement and did not announce any new measures to shore up the economy. The indexes regained most of the lost ground at close with the Nasdaq up 5.3%.

The S&P 500 and the Nasdaq indexes plunged from as high as 1.8% just before the announcement around 2:00 p.m. ET to a decline of 1.9% after the Fed’s statement.

The Fed rate setting committee, in a split 7-3 decision, agreed to hold rate near its target range between zero and 0.25% and keep rate near zero until mid-2013 and said that the economy is weaker that it expected earlier.

The statement also highlighted that the downside risks to the economy have “increased.”

The economy has been struggling despite the second economic stimulus announced in November of 2010 to purchase government bonds of $600 billion. Economy nearly came to a screeching halt in the first quarter and manufacturing expansion, one of the stronger sectors in the economy, has declined to the slowest pace of growth in two years. Business productivity declined 0.3% annual rate in the second quarter.

In addition, existing home sales are 33% lower than the peak in 2005 and home prices across the nation are down between 30% and 50% after four years of the housing market downturn.

Investors bid up the gold in the morning and retracted after the release of the Fed’s statement.

Gold continued to attract speculators and safety seekers after a rating agency downgraded the U.S. debt. Gold has gained 23% in the year so far and now trades above platinum for the first time since December 2008.

In earnings news, AOL Inc plunged 30% after it reported second quarter loss shrank 99% to $11.8 million and said its turnaround is taking longer than it expected.

DISH Network second quarter net increased 30% to $335 million. EchoStar second quarter net income swung to $18 million. Sempra Energy second quarter net income rose to $511 million.

Across the Atlantic, European markets rebounded after dropping as much as 3% in the morning. The sharp reversal in New York trading ahead of the Fed meeting lifted the sentiment. Belgium based insurance and banking group KBC reported higher than expected earnings. London riots continue for the third day.

Stocks in Japan plunged for the third day and extended three day losses to 7.4%. The Nikkei index plunged as much as 4.8% in the morning trading but managed to rebound at close down 1.7%. The broader Topix wiped out all the gains since the rebound after the triple disaster in March. Tepco set aside 500 billion yen to cover disaster related charges.

Australian stocks defied region-wide plunge and rebounded from the earlier plunge of 5.5% to close up 1.2%. The sharp reversal was driven by a broad buying and after China reported weaker than expected inflation in July. Gold soared but crude oil dropped 4.5%.

China reported consumer price inflation accelerated in July to 6.5% from 6.4% in June. The increase in non-food prices was driven by higher demand in smaller cities.

Commodities, Bonds and Currencies

The 10-year U.S. bond yield decreased to 2.29% and 30-year U.S. bond closed up at 3.67%.

The U.S. dollar increased at $1.4249 to one euro and fell against the Japanese yen to 76.91 yen.

Immediate delivery futures of Texas crude oil decreased $0.75 to $80.56 a barrel and futures of natural gas increased 0.065 cents to $4.01 per mbtu and gasoline price increased 0.39 cents to 269.55 cents a gallon.

In metals trading, copper decreased 95 cents to $3.95 per pound, gold increased $31.50 to $1,744.70 per ounce and silver decreased $1.56 to $37.80.

Gold traded above platinum for the first time since December 2008. Platinum added 1% to $1,740.40 an ounce and palladium futures for September delivery increased 1% to $735.45.