18/09/07

US stocks slipped on Monday, one day ahead of the Federal Reserve policy meeting, as investors worried that the central bank won’t cut interest rate by as much as they had hoped. The DJIA fell 39.10 points to close at 13403.42, with weakness in the financial stocks tempered by strength in GM. The S&P500 closed 7.60 points to close at 1476.65 and the Nasdaq closed 20.52 points to close at 2581.66.

After the close, E-Trade cut its profit outlook, saying that tighter credit conditions will force it to get out of businesses that don’t deal directly with retail investors. Shares slumped 8 percent in extended trading.

Ahead of the FOMC meeting, investors eyed Monday's one economic report of note, the NY Empire State index. The index fell to 14.7 in September, from 25.1 last month, missing forecasts for a smaller drop to 18.

Also impacting early trade, comments from former Fed chairman Alan Greenspan about the current financial market turmoil. Greenspan reportedly told news outlets that a risk of recession is greater now than it was at the beginning of the year. He also said that the subprime mess was an "accident waiting to happen", and that the Fed is in a tricky situation now where they just can’t cut rates anymore without risking boosting inflation.

In corporate news, Microsoft suffered a big setback when an EU court dismissed the company's appeal of a 2004 antitrust ruling. The stock close 32 cents lower at $28.73.

Automakers rose as talks between the United Auto Workers union and GM resumed Monday, more than two days after the old labour contract expired. GM added $10.1 to close at $35.23 and Ford Motor added 25 cents to close at $8.28.

Treasury prices fell modestly, with the yield on the 10 year note standing at 4.46 percent, little changed from late Friday.

US light crude for October delivery rose $1.47 to settle at $80.57 a barrel on NYMEX, a fresh record close. However the record price is still below inflation adjusted highs hit in the early 1980's, which would be equal to at least $95 a barrel today.

COMEX gold for December delivery rose $6 to settle at $723.80 an ounce.

Japanese stocks fell sharply today, with the Nikkei average ending down 2.02 percent, its largest fall in a week after banking shares were battered by rising global credit fears. Shares in Mizuho Financial Group fell to a two year low as investors moved to dump financial stocks after Credia became Japan's first listed consumer lender to fold, pressuring peers. The Nikkei closed 325.62 points lower at 15801.80.

UK stocks closed 1.7 percent lower on Monday, as Northern Rock pulled financials deep into the red for a third session in a row. The company lost 35.5 percent and its peer Alliance & Leicester slid 31.3 percent, falling sharply towards the end of trade. Analysts noted that its balance sheet was a similar size to that of Northern Rock. Unlike Northern Rock, Alliance and Leicester said it had not sought assistance from the Bank of England, adding that it saw no reason for the share price fall. Alliance and Leicester and Bradford and Bingley were also hurt by downgrades by Citigroup to sell from hold. RBS also said in a note that neither Alliance and Leicester not Bradford and Bingley was as exposed as Northern Rock to wholesale funding but added that Alliance and Leicester had a similar sized balance sheet with a large block of treasury assets.

The FTSE100 closed 106.5 points lower at 6182.8, with many looking to the Federal Reserve's decision on US interest rates tonight, when it is expected to lower rates. The Fed has not lowered rates by more than 0.25 percentage points at a single meeting in almost five years, but this time analysts feel a deeper cut is needed to help with the present subprime lending crisis.

RBS fell 4.3 percent after ABN AMRO's CE said late on Sunday that the RBS led consortium would most likely buy the Dutch bank as the value of the Barclays offer for ABN had little chance of matching the consortium's bid.

House builders also suffered, with Barratt Developments and Persimmon losing 7.3 and 6.9 percent respectively. Merrill Lynch also downgraded seven real estate companies, saying it was unwise to be too aggressive on rental growth for London offices and pencilled in flat rents in 2008. Merrill cut its rating on Minerva to sell from buy. It shares lost 16.3 percent.

On the upside, Sage added 2.8 percent to top the FTSE100 leaderboard as traders cited vague bid talk. Sage declined to comment on the market speculation.

Economics

UK CPI (Aug) 09.30bst

CPI is expected to remain at 1.9 percent in August (1.89 percent to two decimal places). There is expected to be a gain of 1 percent in food prices, partially reversing the 2 percent fall last month. Petrol prices were broadly unchanged on the month in August. RPI is expected to edge up to 4 percent as July's rate hike starts to affect mortgage interest repayments.

US PPI (Aug) 13.30 bst

Look for the core PPI to rise 0.2 percent, taking the year on year rate to 2.1 percent from 2.3 percent. Recent monthly readings have been under control for both core consumer goods and capital goods. Headline PPI is expected to fall 0.2ppt due to lower energy prices. We know that gasoline fell 6 percent and lower natural gas prices should feed into lower residential gas prices. Finished food prices should rise 0.7 percent, finally reflecting some impact from higher crude and intermediate prices in previous months.

US Net long term TIC flows (Jul) 14.00

Net foreign security purchases boomed at over purchases of US Treasuries jumped to USD32bn in June, after totalling just USD3bn in the first five months of the year. Long term TIC flows are expected to slow to USD80bn in July. Domestic security purchases should be sizeable at USD100bn.

US NAHB housing market index (Sept) 18.00bst

The NAHB index is in historically pessimistic territory, falling from 24 to 22 in August. The index remained at 25 or lower for only three months from November 1990 to January 1991, so the current environment is already close to matching that episode. A drop to 21 in September is expected.

US FOMC rate announcement (Sept) 19.15 bst

In response to the ongoing liquidity crunch and the associated downside risk to the economy, HSBC expect the FOMC will cut the Fed funds rate by 50bp and the discount rate by 75bp in an effort to get ahead of the curve and install confidence. Such a move could be the circuit-breaker financial markets are looking for, at least in the short run, and therefore markets could paradoxically take out some of the expected further easing priced in for 2008. By reducing the penalty to 25bp between fed funds and the discount rate, a narrowing of the 3 month LIBOR and Fed Funds spread would be probable. The downside growth risk will be maintained, but by likely removing the description of the downside growth risks as having "increased appreciably", this will be viewed as a positive shift. There are good arguments for Fed funds to only be cut 25bp (ie moral hazard, it looks like panic, the data is OK, Fed contacts are saying the economy has not yet felt the financial turmoil), but on balance, HSBC feel the Fed will want to avoid the risk of a disappointing market reaction.

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