Rate Cut Soar Stocks, Gold; Record Low Dollar

123jump.com Staff
18 Sep, 2007
New York City

Stocks in New York soared after the aggressive rate cut of 50 basis points by the Fed. The preemptive action is expected to prevent economy from sleeping to receission, but may add to long term inflation. After the rate cut stock market jumped more than 2.5% but gold jumped 1.6% to a 27-year high. Oil closed at third record close in a row. Dollar fell 1.6% against euro, record low close. Brazil surged 4.5% and the Bank of England added liquidity to the systems after refusing to do so for weeks.

[R]4:30PM New York, 10:30PM Frankfurt, 2:00 AM Mumbai[/R]

[R]Market averages in New York surged on the Fed decision to lower rate by 50 basis points. The Fed action though welcomed by the stock market may prove inflationary in months to come. Gold jumped to 27-year high. Dollar fell to record low level against euro.[/R]

Dow Jones Industrial Average surged 336.05 or 2.51% to 13,739.47, Nasdaq soared 70.00 or 2.71% to 2,651.66, and S&P 500 advanced 43.12 or 2.92% to 1,519.77.

FTSE 100 Index in London gained 100.50 or 1.63% to 6,283.80, in Tokyo markets fell to 15,801.80, down 2.02% or 325.62, and in Brazil, iBovespa Index traded higher 4.6% or 2,502.52 to 56,843.06.

Bond Yields gained on 10-year U.S. bonds to 4.485% and 30-year bond to close at 4.763%.

Crude oil increased $0.94 to close at $81.51 per barrel, third record close in a row for a front month contract, natural gas closed down 8 cents to $6.57 per mBtu, and gasoline futures increased 2.96 cents to close at 207.38 cents per gallon.

Gold gained $11.50 in New York trading to close at $735.30 per ounce at high of the day, silver closed 33 cents higher to close at $13.23 per ounce, and copper for front month delivery in London fell $50.50 to $7,538.00 per pound.

Of the 30 stocks in Dow Jones Industrial Average, 1 closed lower, 29 closed higher, and none was unchanged. Banks led the gainers in the index. JP Morgan Chase led the index stock with a rise of 5.45% followed by increases in Citigroup of 5.2%, Caterpillar of 4.87%, and in Alcoa of 4.6%. Boeing was the only loser in index with a decline of 0.64%.

Of the stocks in S&P 500, 494 stocks closed higher and 5 fell, 1 closed unchanged. Fifty Seven stocks in index jumped more than 5%. Lehman Brothers and Moody’s led the index stocks with a rise of 9.5%, followed by increases of 9.2% in Cummins and Nvidia. MGIC, Macy’s, and Terex jumped 8.5%. Kroger, MBIA, and McGraw Hill added 8%.

In New York trading stocks surged to near 3% jump after unanimous decision to lower fed fund target rate by 50 basis points to 4.75%. The Fed also lowered discount rate by 50 basis points. The first rate cut in four years helped averages to jump sharply in the afternoon trading.

Investors had hoped that the Fed will lower rate in today’s meeting but were not sure of the size of the rate cut. The Fed acknowledged, in the accompanied statement, that the preemptive action is to prevent the fallout from the financial market turmoil hurting the economic stability. The Fed action, though widely rejoiced in the stock and bond market had a casualty in the currency market. Dollar fell to a record low against euro and fell 0.8% to 1.3981 to a euro. The Fed had a difficult choice to make. Lowering rate helps economy but also increases price of imported goods. The dollar is likely to trade sharply lower against pound, euro, and yen in the months to come. Oil surged to a record high for the third day in a row.

Gold jumped to a 27-year high. The rate cut was viewed by the market as inflationary and demand for gold jumped after the rate cut decision. Gold jumped 1.6% to $735.50.

Lehman Brothers ((LEH)) reported third quarter earnings of $1.54 per share, 3% decline on 22% lower revenue. The widely watched earnings put investors at ease, after the market was prepared for large drop in earnings. Best Buy ((BBY)) earnings jumped nearly 9%.

Kroger ((KR)), grocery retailer, reported third quarter earnings jumped 38 cents from 29 cents a year ago on same store sales increase of 5.1% excluding fuel sales. Net earnings increased to $267.3 million from $209 million a year ago in the same period. The company raised the annual earnings guidance between $1.64 and $1.67 from $1.60 to $1.65 per share. Stock jumped 7.7% at close.

AutoZone ((AZO)), retailer of auto parts, soared 5% after reporting earnings per share of $3.23 from $2.92 in the prior year. Gross margin improved to 50.1% from 49.7% a year ago. For the quarter sales increased 3.7% to $6.2 billion.

In European Markets trading indexes closed sharply higher ahead of the rate decision. Spain led the region with a gain of 2.5% followed by rises of 2% in France, 1.8% in Italy, and 1.6% in Belgium, Netherlands, and UK. Switzerland added 1%.

In Latin Markets trading Brazil led the gainers with a rise of 4.30% followed by increases of 2.91% in Argentina and 2.72% in Mexico. Chile gained 1.1%. Of the 63 stocks in iBovespa index 60 gained, 3 lost, and none closed unchanged. Bradespar led the gainers with surge of 7.5% followed by 7% increase in CVRD, and 6.7% in Natura, 6.5% in Lojas America, and 5.8% in Brasil Telecom and CESP.

[R]2:15AM New York – The Federal Reserve lowered the rate by 50 basis points to 4.75%.[/R]

The Federal Reserve Bank, bowing to the pressure from the Wall Street, dropped interest rate down by 50 basis points to 4.75%. The fed funds have stayed at 5.25% since June 2006. The first rate cut in four years was designed to prevent widening financial market turmoil to broader economy.

Wall Street for days had been clamoring for a rate cut and in the last two weeks had anticipated rate cut of 50 basis points. Market analysts had projected that 25 basis points will not be enough to maintain economic stability and prevent ongoing housing market correction to slow the economic growth. The Fed also lowered the discount rate by a half percentage point to 5.25%.

The Fed’s aggressive action is viewed by market as a preemptive move to sustain economic growth and stability. Stocks rallied on the news.

The Fed statement noted that “economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”

The Fed is worried that the fallout from the financial markets turmoil may broaden to domestic economy and damage the health of global economy. Libor rate, the rate charged by banks to each other for borrowing, has increased in the last two months to 5.59%. The Fed has been monitoring the rate rise and has been worried that the rate rise in Libor will affect most borrowers. Most consumer and business loans are tied to the Libor interest rate.

Market rejoiced in the Fed’s move and the Dow Jones index quickly shot up more than 200 points after the rate cut. Investors have been asking the Fed to lower rates before the economy slowed and did not want the Fed to wait for more confirmation in the economic data. The latest monthly jobs report showed first decline in jobs in August and retail sales and industrial production have been reported at below estimates of the most economists. The Fed in apparent attempt to keep economy chugging may have harmed dollar for months to come. While stock markets are trading higher on the news today, the reality may sink in the days to come. Lower rates are not likely to correct housing market excesses of the last five years. If anything, lower rates will only encourage more reckless lending. The value of dollar may be sacrificed to keep economy growing at all costs.

The lower interest rates will drag dollar lower against euro and yen in the days to come. While lower dollar will help manufacturing export but will fuel inflation as prices of imported goods rise.

Today’s rate cut may haunt the Fed in months to come if inflation rears its ugly head. Several economists have suggested that the Fed should not bow to the pressure from the Wall Street and those who took excessive risk in credit market should not look to central bank for a possible bailout. The current move by the Fed may be seen as bailout in international currency market that stock and bond investors have been hoping for months.

[R]1:00PM New York, 6:00PM London - The UK stocks leapt as bank's shares rebound. UK leading mortgage lenders shares led the gainers. The inflation in UK beat the forecasts.[/R]

London stocks reversed earlier losses climbing 1.63% or 100.5 to 6,283.3 as confidence starts crippling in following government announcement that it will take full responsibility of deposits in the banks. It was red arrows on London stocks as stocks fell spurred by panic withdraws by Northern Rock depositors. Savings worth 2.2 billion pounds had been withdrawn by the close of Monday. Of the 102, FTSE 86 stocks gained, 12 declined and 4 were unchanged.

In London trading FTSE 100 surged 1.63% or 100.5 to 6,283.3 spurred by gains recorded by the banks. Banks gained after the announcement by UK government that it will take full responsibility of deposits.

The Office of the National Statistics reported that consumer price index increased 1.8% in August from a year ago compared to 1.9 % in July. Economists had projected the rate to remain unchanged.

Inflation has slowed from a decade-high of 3.1 % in March. Prices rose 0.4 percent compared to July. The Bank of England had projected that the August inflation rate may come in at below the target rate. The new inflation rate may cause the BoE to lower its interest rate forecast.

Exchequer Chancellor Alistair Darling revealed Tuesday that the forthcoming IMF meeting would among other issues focus on global financial regulations to enhance transparency in the global financial markets. Earlier yesterday, Darling had held talks with the U.S. Treasury secretary over the current turbulence in the world financial markets. Darling said their talks were centered on devising new measures for regulating international markets.

Paulson, however noted the need to review the global market laws but highlighted the necessity for a carefully approach as stiff regulations could turn out to be disastrous. Chancellor Darling also pointed out that the ongoing upheavals in the world financial market arising from the U.S subprime mortgage market problems was affecting the entire world.

Of the FTSE 100 index heavy looser tops the gainers. The troubled Northern Rock gained 8.22%, Liberty plc rose 5.06% Barclays plc gained 4.48%, while Antofagasta put up 4.46%.

Standard Charted, Royal Scotland, Land Securities, Barratt Development, Lloyds TSB all recovered from Monday losses with their stocks surging 4.15%, 3.44%, 2.79%, 1.56% and 1.27% respectively.

Of the FTSE 100 index stocks, Lonmin shed 3.62%, Marks and Spencer closed weaker at 0.70% Mitchells slid 0.68%, Persimmon declined 0.53%, while Sage eased 0.50%.

[R]11:00AM New York – 11:00PM Sydney - Australian stocks fell again on the back of renewed concerns over the subprime mortgage crisis and its effects on credit market. The Aussie dollar continued to slide. Australia lowers estimate for barley, wheat and canola crops harvest.[/R]

In Sydney trading ASX 200 Index fell 1.26% or 78.9 to 6,192.50. Australian stocks fell, as the subprime mortgage crisis was revived by withdrawals from British Bank Northern Rock Plc.

Newcrest Mining Ltd. jumped after gold prices rose to a 16- month high on speculation the credit crisis will spur central banks to reduce interest rates and boost demand for precious metals as an alternative investment to currencies. There were concerns that the cost of credit will keep rising. Interest rate for overnight loans in pounds that banks charge to each other, known as Libor, has been rising since June month, which prompted UK mortgage lender, Northern Rock to seek emergency funding to finance its customer's withdrawals of their savings.

The Australian dollar dropped 1% to A$0.8311 against the American dollar from A$0.8393 in yesterday’s trading. The fall, the most this month, was prompted by withdrawals from British mortgage lender Northern Rock Plc caused global stocks to slump, spurring traders to sell higher-yielding currencies.

The local dollars rated as the worst performers among the 16 most-actively traded currencies as investors reduced carry trades in which they bought the nations' securities after borrowing in Japanese yen.

Australian companies and consumers may face higher borrowing costs according to comments of the governor of the Reserve Bank of Australia. Reserve Bank of Australia policy makers were expected to craft a solution and indicate how they would react given that the domestic economy is showing few signs of slowing, while the world economic growth was likely to be weaker than they expected.

Australia also forecast a cut for barley, wheat and canola crops to 31 percent on dry weather, adding pressure to shrinking world supplies that have driven up prices.

Total grain harvest is estimated to be lower by 31%. According to the Australian Bureau of Agricultural Resources and Economics, October harvesting season is expected to yield 25.6 million metric tons compared to the June estimate of 37 million tons and last year's drought-ravaged crop of 15.7 million tons.

Wheat futures jumped sharply to near record level as demand exceed supply and inventories head for a 26- year low.

Barley production was expected to come to 5.9 million tons, down from the June forecast of 9 million while Canola output may be 1.1 million tons, down from a 1.4 million tons estimate. Australia is the world's third-largest canola exporter after Canada and Ukraine.

Of the ASX 200 index shares, Sino Gold Mining led the stocks with a gain of 7.20% followed by increases in AWB Ltd of 5.28%, in Newcrest mining of 4.53%, in Paladin Resource of 2.4%, and Iress Market Technology of 2.33%.

Of the ASX 200 index stocks, Commander Communications declined with a fall of 5.56% followed by losses in Compass Resource of 5.57%, in MFS Ltd of 5.58%, in Bradken of 5.74%, and in Adelaide Bank Ltd of 6.99%.


[R]9:00AM New York – Stock index futures indicate higher opening after Lehman reported only 3% drop in earnings.[/R]

Investors were relieved after the Lehman Brothers earnings report. Worried investors feared that deepening mortgage market crisis could hurt earnings at brokerage companies and were ready for a sharp drop in earnings. Just a day ago E*Trade had cautioned the market that earnings may decline as much as 31%.

Lehman Brothers ((LEH)) reported third quarter earnings of $1.54 per share beating the estimate of $1.47 on rising fees from equity offering business. The earnings of $887 million in the quarter were 3% lower than $916 million a year ago.

Revenue from bond markets trading fell 47% to $1.06 billion but in the investment banking increased 48% to $1.07 billion. International revenue was 53% of total revenue. Asset management and brokerage fees increased 33% to $802 million. The diversified revenue across various banking services and in different geographic regions helped Lehman in mitigating losses from the mortgage market meltdown.

Best Buy ((BBY)) earnings jumped 8.7% on 15% rise in revenue. The stock jumped 5% in the pre-market trading.

Indexes in Europe and New York rallied after the earnings from Lehman Brothers. Nervous investors put asides worries that the brokerage companies may report sharply lower earnings.

On the economic front, August producer price index fell 1.4% followed by 0.6% rise in July. The core index of prices, excluding energy and food, rose 0.2% after adding o.1% in July.


[R]8:00AM New York, 8:00PM Hong Kong – Asian stocks fell on rising oil price and declining banks.[/R]

Asian markets fell dragged lower by financial and real estate stocks. Japan led the region with a loss of 2% followed by declines of 1.8% in Korea, 1.5% in Taiwan, and 1.2% in Australia. India bucked the trend and jumped 1.1% and the led the region’s gainers. Singapore edged a fraction higher.

In Hong Kong trading energy stocks closed higher on record oil price. PetroChina gained 0.9% and Cnooc added 3.3%. Ahead of rate decision in the U.S. property stocks in Hong Kong fell. Wharf Holdings Ltd led the sector with a loss of 4% followed by 3% decline in Henderson Land, and 2.5% loss in Hang Lung properties.

In Shanghai trading banks led the decliners. China Merchants Bank fell 2% and ICBC edged 0.21% lower. Separately Bloomberg News is reporting that the bank has raised Rmb58 billion or $7.8 billion on the sale of 9 billion shares at Rmb6.45, top end of its offer price. The second largest bank is offering stocks in Shanghai to take advantage of investors’ appetite. The bank offering was oversubscribed by forty times.

In Sydney trading National Australian Bank led the decliners with a loss of 3%. Australian Bureau of Agricultural and Resource Economics lowered its production target for the upcoming harvesting season for wheat, canola, and barely by 31% to 25.6 million tons from June estimate of 37 million tons. Wheat production target was lowered to 15.5 million tons.

The Reserve Bank of Australia governor suggested that the local interest rate environment may toughen for borrowers. The comments put bond market on the edge and Australian dollar fell. Australian dollar dropped to U.S. 83.20 cents and 10-year bond yields on the bonds fell to 5.93%

[R]6:00AM New York, 7:00PM Tokyo - Financial stocks led the decline in Tokyo. Demand for services and retail sales fell in July as typhoons and declining disposable incomes take their toll. Yen firms as investors reduced holdings on high-yielding assets funded by loans from Japan.[/R]

Japanese stocks traded in the red, dragged down by financial stocks on resurgent fears that the credit market turmoil will affect global financial markets. The drop in demand for retail services and sales for July also dampened market sentiment. Of the 225 Nikkei stocks, 14 gained, 197 declined while 14 traded unchanged. Of the index stocks, 63 shed more than 2%.

In Tokyo trading the benchmark Nikkei 225 plunged 2.2% or 325.62 to 15,801.80. Financial stocks led the decline coupled by waning investor sentiment after The Ministry of Trade announced that demand for retail services had slipped for the month of July on bad weather and falling disposable incomes. Statistics from the trade ministry showed the tertiary index, which measures the amount households and businesses spend on services slumped 0.5% from June.

Notwithstanding the 9-year low jobless rate, falling disposable incomes caused by wages that have been falling every month this year, and slipped the most in 3 years in July, took their toll on sales. Retail sales for the month of July plunged 2.2%. Household spending fell for the first time this year. Consumer confidence and consumer spending fell to a 2-year low as the Topix index declined 3.9% in July. Since then the index has plummeted by 10% and sentiment is bearish over the outlook period.

Investors also turned to Japanese government bonds on strengthening yen and expectations that the Bank of Japan will keep a hold on the interest rates. The yield on the benchmark 10-year bond was down around half a basis point at about 1.540%. Fears that the turmoil on the credit markets will persist led the yen higher against the major currencies. The yen firmed 0.7% against the New Zealand dollar to 80.82 and against the pound by 0.4% for the third day to 228.63. Against the euro and the dollar, the yen also rose to 159.31 and 114.96 respectively.

Of the Nikkei 225 index shares, financials led the downtrend as investor’s confidence in banks fell, prompted by a run on deposits at UK mortgage lender Northern Rock and warning by the Bank of America. Mizuho Financial, Japan’s second biggest lender slipped 7.61% followed by Mitsubishi UFG edging down 7.34%. Commercial bank Resona Holdings also slipped by 6.47%. Ferokawa Electrical and Mitsui Trust Holdings anchored the five decliners at 6.39% and 6.36 respectively.

Canon led the advancers in the index, climbing 2.17%. Mitsumi Electrical edged up 40 or 2.06%. Sumitomo Chemicals and Shionogi soared 1.94% and 0.84% in that order. Matsushita Electric Work, fifth largest gainer in the index with a rise of 0.68%.

Inpex failed to buck the downtrend despite the record increase of oil to more than $80 per barrel, 24-year record. The oil company shed 0.88% at the close of trade.

Gold also touched a 16-month high at $728.90 per ounce on the New York Merchantile Exchange.

Japanese consumer lender Credia, in which JCB has 21% stake, filed for bankruptcy after is faced difficulty in raising capital and repaying debt amounting to 56.5 billion yen.