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By Jennifer Yousfi
And Jason Simpkins
Money Morning Editors
U.S. markets advanced yesterday (Monday), erasing most of Friday's losses, as hopes of another Federal Reserve rate cut buoyed investor optimism and kept the U.S. indices from following the Asian and European markets' lead.
Friday saw all three major U.S. indices in the red. The blue-chip Dow Jones Industrial Average Index sunk 1.50%. The tech-laden Nasdaq Composite Index was down over 3.19%. And the broader S&P 500 Index dropped 1.97%.
In response to Friday's U.S. losses, Asian and European indices took a tumble yesterday.
Asian markets saw losses across the board as continued fears of a U.S. recession and the eventual effect on export trade got priced into the market again. The Tokyo-based Nikkei stock average was down 3.97%, while China's Hang Seng index lost 4.25%.
Europe's markets faired slightly better, as London's FTSE 100 slumped 1.36%, Frankfurt's DAX stayed flat with a scant 0.03% gain, and Paris's CAC 40 was down 0.61%.
It looked like U.S. markets were likely to follow, but instead reversed the trend as investors hoped an additional Federal Reserve rate cut would come out of the Federal Open Market Committee meeting being held today and tomorrow.
Anticipating the boon lower rates would mean to both financial firms and homebuilders, investors snapped up shares of Bank of America Corp. (BAC) [up 4.36%], Citigroup, Inc. (C) [up 3.79%], and Pulte Homes, Inc. (PHM) [up 5.19%].
A Paradigm Shift
The old economic adage is that if the U.S. sneezes the rest of the world catches a cold, but that may not necessarily be true anymore. What can be said is that if the U.S. catches pneumonia the rest of the world better stock up on penicillin. And the temperature in the United States has been rising for a while now.
The meltdown of the U.S. subprime-mortgage market has pushed up credit costs worldwide and forced European and Asian banks to write down billions of dollars in holdings. Less equity and credit has resulted in less spending by American consumers and companies, reducing demand for imported goods. Now as fears of a recession hits home, tumbling U.S. stock prices are dragging down markets elsewhere.
"What's worrying us is the specter of a recession," Emmanuel Soupre of Paris-based Neuflize Gestion told Bloomberg News. "A few weeks ago, no one was capable of determining whether we were facing a slowdown or a recession. The more time passes, the more the ghost of a recession appears. We're convinced stocks can fall farther."
Some analysts see global growth decelerating from a 4.7% rate in 2007, to a 3% pace, indicative of a worldwide recession.
U.S. Gains on Fed Hopes
Meanwhile, all three major U.S.-indices had gains for the day, as the Dow Jones rose 1.45%, the NASDAQ climbed 1.02%, and the S&P 500 was up 1.75%.
Rather than causing markets to stagger, a weak-housing report for December released by the Commerce Department yesterday, only increased speculation that Bernanke will act again. The Fed futures market is pricing in an 88% probability of a 50-basis point rate cut, which would bring the key interest rate down to 3.0%.
"There's hope that Ben Bernanke will do more on Wednesday," Alan Lancz, president of Alan B. Lancz & Associates Inc., Toledo-based investment advisory firm, told Reuters. "Last week's 75 basis-points cut was a nice turnaround, and some kind of follow-through will be good, too."
As Bernanke continues on his rate-slashing torrent, it becomes increasingly likely that central banks abroad will follow suit, even though their main concern seems to be inflation for the time being.
Kara – a former economist at the Bank of England – is predicting four cuts from the British central bank this year, and two from the European Central Bank.
Only the Bank of Canada responded to the U.S. emergency rate reduction last week, cutting its rate by a quarter point, as it braced for a U.S. slowdown. But if the Fed gets back to the business of cutting rates tomorrow, other central banks may not be left with much of a choice.
"The odds are shifting toward a more significant global monetary easing," Richard Berner, co-head of global economics for Morgan Stanley in New York, told Bloomberg News.
News and Related Story Links:
U.S. Stocks Gain on Rate-Cut Speculation; Financial Shares Rise
U.S. stocks close higher as investors bet on rate cut
The Associated Press:
Wall Street rallies on hope for Fed rate cut
Stocks Fall in Europe, Asia, U.S. Futures Drop; Total Declines
- Money Morning:
Fed Rate Cuts May Bode Well for the Greenback