US stocks fluctuated on Wednesday, ending a volatile session mixed after being briefly supported by news from the Federal Reserve, then slipped as credit concerns dampened enthusiasm. The DJIA closed 25.20 points lower at 13207.27, the Nasdaq finished 4.98 points higher at 2601.01 and the S&P500 closed 1.98 points lower at 1453.
Stocks were higher in early trading, as the Fed announced results for its first auction of $20bn, signalling strong demand for the plan aimed at thawing frozen credit markets. But Morgan Stanley's $5.7bn subprime related writedown and credit market concerns brought up by S&P's warnings about bond insurers credit ratings, dragged the markets down in the afternoon.
In a troubling sign of more credit market turmoil, bond insurer ACA Financial Guaranty Corp saw its "A" credit rating cut down to non investment grade "CCC" by S&P. Other bond insurers, including Ambac Financial Guaranty Insurance Co, MBIA Insurance Corp and XL Capital Assurance were also graded lower by the news. Adding to the volatility, stock index futures and options and individual stock futures and options will all expire simultaneously tomorrow. Investors also reacted to the results of the Fed's $20bn auction launched on Monday. The first of four auctions showed strong demand, as the central bank loaned $20bn at 4.65 percent. That was slightly below the discount rate of 4.75 percent.
In company news, Morgan Stanley posted a bigger than expected quarterly loss and said it would take an additional $5.7bn in writedowns on top of the $3.7bn it had already announced, due to the suprime mortgage mess. However, investors were somewhat comforted by the company's announcement that it will receive a $5bn capital investment from a Chinese state run investment fund. Morgan shares were higher, along with other major banks including Lehman Brothers and JP Morgan.
Shares of Sallie Mae were more than 20 percent lower as the lenders CEO hinted in a shareholders conference call that a dividend cut may be necessary to soften the blow of rising loan defaults.
Homebuilder, Hovnanian plunged 12 percent after reporting a quarterly loss that more than quadrupled from a year ago. And in the latest bad news for the housing sector, the level of foreclosures was up 68 percent in November from a year ago, according to tracking service RealtyTrac. On the upside, foreclosures fell 10 percent from the previous month.
In other news, Palm fell more than 6 percent after the company reported a loss and warned that revenue for the quarter would be lower than expected.
After the close, Oracle Corp reported better than expected earnings and sales, giving the company's shares a boost in after hours trading.
Treasury prices rose, lowering the yield on the 10 year note to 4.03 percent from 4.14 percent.
US light crude for January delivery rose $1.16 cents to $91.24 on NYMEX after the government's weekly report showed lower than expected crude supplies.
In currency trading, the dollar gained versus the euro and the yen.
COMEX gold for February delivery fell $2 to $805.40 an ounce.
Japanese stocks pared earlier gains today to close flat, as investors were quick to book profits in a highly volatile session with light trade. Bank shares including Mitsubishi UFJ Financial Group rose on news that will refuse to pay into a US led subprime rescue fund. The Nikkei average ended the session 1.1 points higher at 15031.6
UK stocks ended flat on Wednesday as a persisting credit seizure offset news of solid demand for a $20bn Federal Reserve auction aimed at easing the liquidity strain. Credit fears were exacerbated in late trade by credit rating agency S&P action on six US bond insurers, with one insurers rating being cut by 12 notches to "junk" territory from investment grade.
UK banks staged a mixed performance, with Alliance and Leicester adding 2.2 percent and HSBC up 0.6 percent, while RBS and Standard Chartered also rose . But others stayed on the defensive after Goldman Sachs downgraded four European banks, including Barclays which traded 2 percent lower. Northern Rock added 4.4 percent to lead the FTSE gainers after hedge fund SRM Global said it had again edged up its stake in the bank to 9.74 percent, up from 9.51 percent it announced on Tuesday. Gordon Brown said the government was doing everything to help Northern Rock find the right buyer.
The FTSE100 closed 5.2 points higher in thin trade in the run up to the Christmas.
The energy sector rose, with Royal Dutch Shell up 2.2 percent and BG Group up 0.5 percent as Crude oil price rose above $91 a barrel. BP fell 0.4 percent after a rating downgrade from JPMorgan. Oil price ended a four day run of losses, after crude oil stocks in the US fell more than expected last week to their lowest in nearly three years.
InterContinental Hotels was a standout loser down 2.2 percent after Morgan Stanley reduced their rating to "equal weight" from "overweight" and lowered its price target to 980 pence from 1100 pence.
United Utilities was among the worst performers, off 1.9 percent, as the stock traded ex-dividend.
Economics
Japan Bank of Japan rate announcement (Dec) The Bank of Japan are expected to maintain the current guidelines for money market operations with vote of 8-1, given the uncertainty about the US economy. HSBC predict the next 25bp Rate hike will come in September 2008, as the Bank of Japan will have to assess the liquidity risk in Europe and the US and the downside economic risk from US sub prime mortgage problems.
UK GDP (Q3, final) 09.30 gmt
The final estimate of GDP growth is expected to be unchanged at 0.7 percent in the third quarter, but there is a reasonable chance it will be revised back up to 0.8 percent, in line with the initial reading. In this release, we will get the income side of the accounts, which is likely to show continued weakness in real disposable income. However, with spending remaining decent, the savings ratio, which often receives attention, is likely to remain well below the historical average.
UK Public finances ( Nov) 09.30 gmt
Borrowing is expected to be roughly £11bn in November, which would take borrowing so far this fiscal year to £35bn, well above the £27bn seen at this time last year. Following the PBR, the Chancellor estimates he will borrow £38bn this tax year. At this stage, it looks as if he may miss even this upwardly revised target.
US GDP (Q3, final) 13.30 gmt
There is expected to be little change in the final reading for Q3 GDP, with growth staying at 4.9 percent and the price deflator staying at 0.9 percent.
US Initial jobless claims (week 15 Dec) 13.30 gmt
Initial claims dropped to 333k, while the 4 week average has been steady at around 338,750. This week claims are expected to be 340k.
US Philadelphia Fed( Dec) 17.00 gmt
The detailed series in the Philadelphia Fed survey have weakened in the past two months, with the ISM weighted average at 1.7 in November. The actual ISM manufacturing index has also decelerated in these two months to 50.8. Assuming new orders and shipments remained subdued, HSBC think the deadline index (based on a separate question) may fall to 4 from 8.2
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