US stocks rebounded yesterday following the Federal Reserve's decision to hold interest rates and rumours that they were considering a rescue package for insurer American International Group. Stocks initially dropped following the rate decision but soon turned higher as investors realised this meant the Fed felt that the state of the economy hasn't worsened.
The Dow Jones jumped 141.51 points to close at 11,059.02, the S&P 500 gained 20.89 points to end at 1,213.59. The Nasdaq rose 27.99 points to finish at 2,207.90.
AIG opened 70% lower yesterday as it struggled to raise around $75 billion to avoid collapse. But the stock recovered to end the session 20% lower as optimism grew that US authorities would finance a rescue of the company. After the close however, shares slumped 50% on rumours that the government is considering conservatorship as a means of rescuing the company. This is the same method that has been used for Fannie Mae and Freddie Mac, enabling the government to oversee operations and protect the assets of the company.
Goldman Sachs Group Inc finished 1.8% lower yesterday after reporting its profit fell 70% in its third quarter, to $845 million. Just a year ago the company reported profit of $2.85 billion!
Washington Mutual jumped 16%, rebounding from a 27% decline during Mondays session. The bounce came after reports suggested that JPMorgan Chase could make a bid for the company and that seemed to help the shares recover.
Elsewhere, Hewlett-Packard Co added 6.8% after its chief financial officer said the company is "very confident" it can hit its current quarter profit target. In contrast, Dell Inc tumbled 11.2% after the company said it was seeing softer global demand for technology.
US light crude oil dropped $4.56 to $91.15 a barrel, as investors continued to bet on a global economic slowdown. COMEX gold for December delivery slid $6.50 to settle at $780.50 an ounce. Treasury prices dropped, raising the yield on the 10 year note to 3.49% from 3.39% late Monday.
The Nikkei gained 140.07 points to close at 11,749.79 this morning, rebounding from a three year low. Investors sought out stocks they believe can withstand an economic slowdown, sending food related stocks to their sharpest gain in almost two years. Tokio Marine Holdings Inc, Japan's biggest insurance group, rose 5.3% after the US government said it would take over AIG.
The Hang Seng is currently 213.77 lower at 18,086.84, reversing earlier gains as investors worried that credit crisis will cause more bank failures. HSBC Holdings Plc declined 1.5% after CNBC reported that Morgan Stanley was considering seeking a merger partner following "turbulence" in its stock.
The FTSE 100 is currently 9.6 points higher at 5,035.2. HBOS leads the fallers having dropped 28% as bank-to-bank lending remains strained. Elsewhere within the UK banking sector, HSBC, Standard Chartered, Lloyds TSB and Royal Bank of Scotland also turned negative. Barclays bucks the trend though, rising 10.5% after agreeing to pay around $1.75 for some of Lehman Brothers' prime US assets.
Economics
UK Bank of England minutes (4th Sept) 09.30bst
Further declines in commodity prices and continued bad news for the outlook for growth suggest the MPC will feel more confident that inflation will fall sharply through 2009. But for now Besley is likely to still be concerned about the impact of elevated headline inflation, so HSBC forecast Besley voting for a 25bp decrease with all other committee members voting for rates unchanged.
UK Unemployment (Aug/Jul) 09.30 bst
The manufacturing and service sector PMIs are both pointing to further job cuts over the coming months. The number claiming benefits are expected to rise by 20k in August and the unemployment rate is expected to edge up for the UK labour market.
UK Average earnings (Jul) 09.30 bst
The debate about whether to focus on the downside risks to growth or the upside risks to inflation rests on the outlook for wage inflation. If workers manage to negotiate higher wages then inflation becomes entrenched and is a medium term problem for the BoE, so this release is very important. HSBC believe if anything wage growth will weaken over the coming months, as workers accept weaker pay rises in order to keep their jobs. For this reason we maintain a relatively benign outlook for UK inflation over the medium term.
US Current account balance (Q2) 13.30 BST
The trade balance widened to -$180.6bn in Q2, from $177.1bn in Q1. Assuming the income balance stays at around $30bn, this should offset net unilateral transfers of about -$30bn. The Q2 current account balance should be -$181bn, or about -5.1 percent of GDP, up from -5 percent in Q1.
US Housing starts (Aug) 13.30bst
Housing starts fell to a cycle low 965,000 in July, while building permits also declined, down to 937,000. New home sales have been relatively stable in recent months, but have not rebounded, and homebuilders are likely to remain generally cautious. Starts and Permits are expected to remain unchanged at 970,000 and 950,000 respectively.
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