Gloomy talk from Greenspan and U.K. bank troubles weighed on equities. Traders debated whether Bernanke & Co. would cut by 25 or 50 basis points on Tuesday
Major U.S. stock indexes finished lower Monday as traders looked ahead to Tuesday's meeting of Federal Reserve policymakers at which the central bank is widely expected to cut the Fed funds target rate by a quarter point. Standard & Poor’s MarketScope says that traders are worried about a U.S. economic slowdown, and the perception Tuesday's expected rate cut won't do much to improve the outlook for the economy and markets.
Wall Street, wary of disruptions to credit markets, was taking cues Monday from jittery European markets, which were unsettled by reports that depositors are anxiously emptying their savings from Northern Rock (NRK.L), after the major British mortgage lender said it had been hit by the worldwide credit crisis. The bank has purportedly lost about 8% of its deposit base.
Also, comments from ex-Fed chief Alan Greenspan warning of a higher chance of recession in the U.S. -- and rising inflation -- likely darkened investor sentiment, says S&P. Greenspan, who is promoting his new memoir, also predicted Monday that the Fed funds rate will climb to 8% in the future in a CNBC appearance.
On Monday, the Dow Jones industrial average was down 39.1 points, or 0.29%, to 13,403.42. The broader S&P 500 index slipped 7.6 points, or 0.51%, to 1,476.65. The tech-heavy Nasdaq composite index fell 20.52 points, or 0.79%, to 2,581.66.
Market sentiment was negative Monday, with 23 shares declining in price for each 10 that gained in NYSE trading. Nasdaq trading breadth was 21-9 negative.
The market appears split as to whether the policy-setting Federal Open Market Committee will cut the Fed funds target rate 25 basis points or take a bolder step and cut it 50 basis points when it announces its policy decision at 2:15 pm EDT Tuesday. Many observers also expect the Fed to cut the discount rate 50 basis points. Many analysts are saying that whatever action the Fed takes won't be enough to stave off further reverberations of the liquidity crisis through the broader economy into next year.
In economic news Monday, the New York Federal Reserve Bank's Empire State Manufacturing Index fell to 14.70 from August's reading of 25.06 and is just under the 6-month average of 17.30. The decline was led by new orders and shipments, with the capital expenditure component slipping 4.5 points to 22.34, while the technology spending component rose by nearly one point to 14.89.
As for the 6-month outlook, the general business conditions index fell to 48.80 after rising for the prior three months to 50.40 in August.
The drop in the manufacturing index translates to a respectable an adjusted reading of 54.5 for the Institute for Supply Management for September, versus 58.7 in August. Action Economics said the correction in the recently over-performing index didn't affect its forecasts of roughly sideways movements in the remaining major sentiment reports, including expectations for a flat Philly Fed reading and 54.0 Chicago PMI figure.
The decline in the index follows weaker-than-expected advances in U.S. retail sales growth and U.S. industrial production reported on Friday, but the market remains nervous about how aggressively the Federal Reserve will take an axe to interest rates when its policy committee meets on Tuesday.
On Monday, crude oil for October delivery soared $1.47 in New York to a record close of $80.57 per barrel following a Goldman Sachs forecast that said oil could reach $85 this year. The market was also spooked by a warning from French Foreign Minister Bernard Kouchner that the world should prepare for war if Iran obtains nuclear weapons and said European leaders were considering their own economic sanctions against the Islamic country.
Among stocks in the news on Monday, Microsoft Corp.'s (MSFT) antitrust appeal was dismissed on most points by a European Union court, which upheld a fine of $689 million imposed by the European Commission. The ruling will force the software giant to open its Windows operating system to competing work group server operating systems.
Aerospace and defense manufacturer Edo Corp. (EDO) was up 7.5% after it agreed to be acquired by ITT Corp. (ITT) for $56 per share in cash.
Leap Wireless International (LEAP) shares fell 1.4% after it said its board of directors, after consulting with financial and legal advisors, rejected an unsolicited proposal from MetroPcs Communications to merge with Leap in a stock-for-stock merger transaction, saying a deal isn't in the best interests of Leap and its shareholders.
Infospace Inc. (INSP) shares soared 26.5% on news that the company will sell its online directory business, including its online yellow and white pages services, to Idearc Inc. for $225 million in cash. The deal is expected to close by the end of 2007. Standard & Poor's reaffirmed its hold rating on Infospace.
European equity indexes finished with losses on Monday after a run on the bank by depositors hammered Northern Rock shares lower. In London, the FTSE 100 index was down 1.69% to 6,182.8. Germany's DAX index fell 0.24% to 7,479.85. In Paris, the CAC 40 index was off 1.8% to 5,439.37.
In Japan, the Nikkei 225 index was closed for a holiday. In Hong Kong, the Hang Seng index slipped 1.20% to 24,599.34. The Shanghai composite index rose 2.06% to 5,421.39.
Treasuries were modestly lower Monday in the run-up to Tuesday’s FOMC meeting. The benchmark 10-year Treasury note was down 06/32 in price to 102-06/32 for a yield of 4.482%, the 2-year note was down 02/32 to 99-28/32 for a yield of 4.084%, and the 30-year bond was unchanged at 104-23/32 for a yield of 4.725%.