Concerted Official Actions Should Calm Traders - RTTNews Daily Market Analysis

Tue. October 07, 2008; Posted: 09:36 AM

(RTTNews) - The major U.S. index futures are pointing to a markedly higher opening on Tuesday. The precedence set by the Australian central bank in announcing a deeper-than-expected interest rate reduction should encourage traders to hope for a rate cut from the Federal Reserve. As another measure to mitigate the credit crisis, the Fed announced today that it would purchase commercial paper, which is the debt issued by corporations. The rebound in commodity prices should support the resource space. Additionally, traders may seek bargains after the steep sell-off in the recent sessions.

U.S. stocks gap-opened lower on Monday session and declined steadily till late afternoon trading before recouping some of their losses towards the close of the session. The marked weakness seen in the session reflected investor pessimism about the effectiveness of the U.S. government's financial bailout plan.

The Dow Industrials slumped to an intra-day low of 9,525 before paring some of it losses and closed down 369.88 points or 3.58% to 9,956. The blur chip average was closing below the 10,000 level for the first time since October 26th 2004. Meanwhile, the Nasdaq Composite fell 84.43 points or 4.34% to 1,863 and the S&P 500 Index fell 42.34 points or 3.85% to 1,057.

The gains the index took about 2 years to build-up have vanished in less than a year, reflecting the steepness of the recent descent by the index. The bearishness is exemplified by the stooping 50-day and 200-day moving averages. If the index dips further-a possibility that cannot be precluded, given the gravity of the credit crisis it could stall or form a base around 9,360. If the market takes off due to the stimulatory initiatives of the Federal Reserve and the government, it could meet with resistance around the 10,376 and 10,971 levels.

Among the sector indexes, the Dow Jones Utility Average slipped 5.50% on Monday and the Amex Airline Index declined 7.91%. The Amex Oil Index and the Philadelphia Oil Service Sector Index lost 3.48% and 7.76%, respectively, while the Amex Gold Bugs Index slumped 6.17%. The Amex Biotechnology Index fell 4.86% compared to a 3.56% decline by the Philadelphia Housing Sector Index. The KBW Bank Index and the Amex Securities Broker/Dealer Index fell 5.57% and 5.13%, respectively. Technology stocks also came under significant selling pressure.

Currency, Commodity Markets

Crude oil futures are rising $2.81to $90.62 a barrel after declining $6.07 to $87.81 a barrel on Monday. Gold futures, which jumped $33 to $866.20 an ounce in the previous session, are advancing $24.60 to $890.80 an ounce.

Among the currencies, the U.S. dollar is trading at 102.58 yen after it weakened to 101.8205 yen at the close of New York trading on Monday. Against the euro, the dollar is valued at $1.3571.

Asia

Stock markets across the Asia-Pacific region closed mixed on Tuesday after opening sharply lower following Wall Street's plunge overnight. The stock markets in Australia and South Korea rebounded. The financial markets in Hong Kong remained closed on account of a public holiday.

Japan's Nikkei 225 average opened lower and saw further weakness in early trading. Nevertheless, the index snapped back some of its losses over the course of trading to end at 10,156, down 317.19 points or 3.03%.

On the economic front, the Bank of Japan's Board of Governors voted to leave the overnight call rate unchanged at 0.50% for the 23rd consecutive meeting at the conclusion of its two-day monetary policy meeting in Tokyo.

Among the economic reports released today, Japan's Cabinet Office said in a preliminary report that the leading index fell to 89.3 in August from 91.4 in July. Economists had expected the index to decline to 89.2. Similarly, the coincident economic index logged a reading of 100.7, down from 103.5 recorded in July. The August reading matched economists' expectations. Moreover, the lagging index came in at 100.2 compared to 101.0.

In the financial sector, Mitsubishi UFJ rose 0.6%, but Mizuho Financial lost 2.7%, and Sumitomo Mitsui dropped 1.3%. Top brokerage Nomura Holdings advanced 0.7%. Auto, oil and technology stocks declined in the session South Korea's Kospi spent the morning session in negative territory before staging a recovery in the afternoon on hopes that exporting companies will benefit from a weaker won. The index closed up 7.35 points, or 0.54%, at 1,366.

Export-oriented stocks led the gainers. Market heavyweight Samsung Electronics gained 2.7% and LG Electronics climbed 3.9%. Top automaker Hyundai Motor rose 2.4%. Construction and steel stocks also posted gains. Daewoo Engineering & Construction soared 5.7% and steel giant POSCO rose 0.9%. However, retailers lost ground on fears that an economic slowdown could bring down consumer demand.

The Chinese market closed lower, extending Monday's losses. The market started off sharply lower, but it came off the day's low as property developers gained on talk of government support measures, including a cut in interest rates. The benchmark Shanghai Composite Index closed down 15.90 points or 0.73% at 2,158, off a low of 2,072.90.

Australia's All Ordinaries languished below the unchanged line till late afternoon trading before it recovered in reaction to a central bank decision to reduce the key interest rate. The Reserve Bank of Australia surprisingly slashed the cash rate by 100 basis points to 6%, bigger than the 50 basis point cut that economists had predicted. The All ordinaries index climbed 53.2 points, or 1.17% to 4,598.

Among banks, ANZ advanced 0.6%, National Australia Bank gained 1.8% and Westpac jumped 3.4%. Commonwealth Bank climbed 2.6% after it said it has entered into exclusive negotiations with HBOS Plc to buy its Australian retail-banking arm BankWest. The major miners ended firmer, with index leader BHP Billiton surging 6.4% and rival Rio Tinto jumping 3.9%.

Europe

The major European averages are trading higher on Tuesday. While the French CAC 40 Index is gaining 2.45%, the German DAX Index is rising 0.27%. The U.K.'s FTSE 100 Index is advancing 2.21%.

U.S. Economic Reports

Minneapolis Federal Reserve President Gary Sterns is scheduled to speak on 'The Financial Shock' in Chicago at 11 AM ET on Tuesday. Federal Reserve Chairman Ben Bernanke is due to speak at an economics conference on 'Economic Outlook and Financial Markets' at 1:15 PM.

The Federal Reserve is scheduled to release the minutes of its September 16th meeting at 2 PM ET on Tuesday.

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 in which 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.

The U.S. Federal Reserve is also expected to release its monthly consumer credit report at 3 PM ET on Tuesday. Consumer credit for August is likely to show an increase of $5 billion.

Consumer credit increased at a seasonally adjusted annual rate of 2.1% or $4.5 billion in July to $2.59 trillion. Economists had expected an $8.5 billion increase in consumer credit for the month. The increase came about due to a $3.9 billion increase in revolving credit. Non-revolving credit rose by $0.6 billion.

Stocks in Focus

Bank of America (BAC | Quote | Chart | News | PowerRating) is likely to come under selling pressure after it reported that its third quarter earnings declined to 15 cents per share from 82 cents per share last year. The results were below the consensus estimate that called for earnings of 62 cents per share. The company also said it would raise $10 billion in capital, which would be partly used for the firm's buyout of Merrill Lynch (MER | Quote | Chart | News | PowerRating). The company also announced a 50% reduction in its quarterly dividend to 32 cents per share.

F5Networks (FFIV | Quote | Chart | News | PowerRating) is likely to be in focus after it said it expects fourth quarter revenues to be $171.3 million, slightly below its earlier estimate of $172-$174 million. At the same time, the company said it expects both its adjusted and reported earnings to meet or exceed its previous estimate. Analysts, on average, expected earnings of 27 cents per share on revenues of $172.9 million.

Advanced Micro Devices (AMD | Quote | Chart | News | PowerRating) is also expected to be in focus after said it will spin-off of its manufacturing unit into a separate company called 'Foundry Company' collaboration with Advanced Technology Investment Company of Abu Dhabi. ATIC would invest about $2.1 billion to purchase its stake in the new company. The company also announced that the Mubadala Development Company would increase in its investment in AMD to 19.3% on a diluted basis.

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