Major U.S. stock indexes closed lower Wednesday, with selling accelerating on the tripping of futures-related selling programs amid increased speculation that Friday's nonfarm payrolls report will show solid improvement from August, S&P MarketScope said. A positive payrolls report would make it less likely that the Federal Reserve would lower interest rates again.
On Wednesday, the Dow Jones industrial average lost its grip on the 14,000 threshold, finishing 79.26 points, or 0.56%, lower at 13,968.05. The broader S&P 500 index ended down 7.04 points, or 0.46%, at 1,539.59. The tech-heavy Nasdaq index slid 17.68 points, or 0.64%, to 2,729.43.
Equities got off to a weak start Wednesday on news that Morgan Stanley (MS) had taken a negative view of chip maker Intel Corp. (INTC) and on weaker quarterly results from Micron Technology (MU). Then some positive private payrolls and service sector reports may have further deflated hopes of further Fed action to pump up the economy.
Another negative weighing on investor sentiment was analysts' dramatically cutting their forecast for third-quarter earnings growth across the Standard & Poor's 500 Index to 2.0% from 3.9%. According to CNBC, the halving of estimates resulted solely from Citigroup's (C) warning on Monday of a 60% drop in its quarterly profit, reflecting the company's large weighting in the index.
On the New York Stock Exchange, for every 21 stocks trading lower, 12 showed gains. Nasdaq breadth was 18-11 negative amid losses by Intel and Broadcom (BRCM) in moderate volume.
Homebuilder and retailer stocks continued to track higher, reportedly on buying by hedge funds managers hoping to catch up on performance by loading up on sharply discounted names and planning to take profits at yearend.
"Whenever we come to the conclusion of one of these bear raids, people are forced to scramble to catch up performance-wise. [The market] went through the same thing each of the last four years," said Brian Reynolds, a chief market strategist at M.S. Howells & Co.
Following the lead of Citigroup and UBS AG (UBS), Deutsche Bank (DB) said it will take charges of around $3.1 billion in the third quarter, sending its investment banking unit into the red to the tune of $352.3 million to $493.2 million, while it still sees overall net profit for the period rising. The German bank's earnings are expected to exceed 1.97 billion in the third quarter, vs. $1.75 billion a year ago, due to gains on property disposals and tax credits.
In the wake of Citigroup's pre-emptive writedown of its assets on Monday, which counter-intuitively sent the Dow rallying to a new high, economists and other market observers continue to debate whether the financial services sector has truly put the worst of the subprime meltdown-cum-credit-crisis behind it, as Citigroup suggested by citing signs of normalizing earnings in the fourth quarter.
Activity in the corporate bond market is making it clear that the credit crisis is windown down and coming to an end, said Reynolds at M.S. Howells.
"Money is flooding into the corporate bond market," he said. "It’s just a matter of time before the [leveraged] buyouts and stock buybacks start back up again."
The thawing of the credit freeze means there's no need for further easing by the Fed on interest rates, he added.
Leading Wednesday's economic news, the Institute for Supply Management’s non-manufacturing index for September came in at 54.8, only mildly weaker than the 55.5 reading that was expected and down one point from 55.8 in August. New orders and prices paid were modestly lower, while the employment component rebounded from a weak August reading to 52.7. The data don't indicate a recession is in the offing, CNBC said.
The U.S. ADP employment report released Wednesday said private payrolls rose 58,000 in September, slightly better than an anticipated 55,000 increase, after a downward-adjusted gain of 27,000 in August. Manufacturing jobs remained weak, falling by 22,000, and goods-producing jobs dropped by another 39,000, while service jobs rose by 97,000. Employment in the financial services sector declined for a second consecutive month. The data were in line with expectations and consistent with an increase of roughly 120,000 in nonfarm payrolls that the Bureau of Labor Statistics is expected to report on Friday, Action Economics said.
The Mortgage Bankers Association reported a 2.7% drop in its Market Composite Index, which measures mortgage loan application volume, to a seasonally adjusted 636.7 for the week ending Sept. 28, from 654.2 the previous week. The Refinance Index fell 3.8% to 1950.4 and the seasonally adjusted Purchase Index was down 1.8% to 411.4. Applications to refinance adjustable rate mortgages rose to 13.8% of total applications from 12.2% the week before.
In a volatile session for oil prices, crude oil for November delivery in New York bounced back and forth between negative and positive territory before finally ending 11 cents lower at $79.94 a barrel on Wednesday. Selling came in response to a U.S. Energy Information Administration report that showed a 1.2 million barrel increase in crude stockpiles to reach a total of 321.8 million barrels in the week ending Sept. 28, instead of the decline of 550,000 to 800,000 barrels that had been anticipated. Distillate inventories unexpectedly fell by 1.2 million barrels, where analysts had predicted a build of 1.3 million barrels.
Among stocks in the news Wednesday, Intel shares were down 2.2% after Morgan Stanley initiated analyst coverage with an underweight rating.
Micron Technology shares fell 8.9% after it reported a swing to a net loss of 21 cents a share in its fourth quarter from earnings of eight cents a share a year ago as lower gross margins offset a 4.7% increase in sales. The random access memory manufacturer said fourth-quarter and fiscal 2007 results were hurt by industry supply/demand dynamics that depressed ASPs for memory products.
Kaiser Aluminum (KALU) shares rose 6.9% on an upgrade by Bear Stearns (BSC) to outperform from peer perform after an "upbeat management meeting." Among the positive signs, Bear Stearns cited the company's projected strength in aerospace, driven by expected strong order growth from international carriers, and organic growth initiatives that remain on schedule. Bear Stearns upped its 2007 profit estimate to $4.65 from $3.45 a share.
E-Future Information Technology Inc. (EFUT) shares soared 66.3% after it said that Beijing Tourism Group (BTG), one of China's largest tourism groups, has licensed its Visual Process Management software to centralize purchasing and optimize business processes of its selected business segments.
Panera Bread Co. (PNRA) shares rose 8% after it narrowed its third-quarter profit forecast to 35 to 37 cents from 32 to 38 cents a share on a reported 35% rise in revenue. The company said system-wide sales rose 0.8% in September at its bakery-cafes open at least 18 months.
European equity indexes were trading higher Wednesday. In London, the FTSE 100 index advanced 0.54% to 6,535.20. Germany's DAX index edged 0.11% higher to 7,955.30. In Paris, the CAC 40 reversed to the upside to trade 0.12% higher at 5,806.18.
Asian markets ended mixed. In Japan, the Nikkei 225 index rose 0.90% to 17,199.89. In Hong Kong, the Hang Seng index leaped dropped 2.55% to 27,479.94. The Shanghai composite index is closed all week for a Chinese national holiday.
Treasury yields bounced on positive ISM non-manufacturing and private employment numbers, which triggered nervous selling from trading and leveraged accounts, Action Economics cited sources as saying.
The 10-year note slipped 09/32 to 101-16/32 for a yield of 4.56%, and the 2-year bond was down 03/32 to 99-30/32 for a yield of 4.02%. The 30-year bond fell 14/32 to 103-06/32 for a yield of 4.80%.