Stocks Plunge on Data, Bhutto Killing
Stocks plunged along a broad front Thursday following news that former Pakistani Prime Minister Benazir Bhutto was killed in a bomb and shooting attack that called into question the return of democracy to the troubled nation and heightened geopolitical tensions. Treasuries rallied as investors sought the relative safety of government debt. Traders appeared to believe reports weak durable goods orders and a small rise in first-time unemployment filings will add to pressure on the Federal Reserve to cut interest rates in January.
On Thursday, the Dow Jones industrial average finished lower by 192.08 points, or 1.42%, at 13,359.61. The broader S&P 500 index shed 21.29 points, or 1.43%, to 1,476.27. The tech-heavy Nasdaq composite index lost 47.62 points, or 1.75%, to 2,676.79.
Action in the broader market was negative, with 24 shares declining in price for every seven that advanced in New York Stock Exchange trading. Nasdaq breadth was 23-6 negative.
The Bhutto news roiled markets, given Pakistan's geographic proximity to Afghanistan, its nuclear capabilities and its pivotal role as a U.S. ally in the war on terror. "At this point, we do not believe this news is destabilizing enough to warrant a reduction in global equity exposure", wrote S&P equity strategist Alexander Young in a Dec. 27 note. “However, we will continue to monitor the situation closely, given Pakistan's geopolitical significance and the questionable commitment to democracy of President Musharaf.”
Fed funds futures, a vehicle for market pros to bet on the direction of interest rates, caught a flight to quality bid on the Bhutto news, which added to geopolitical concerns in the markets, according to Action Economics. The February contract now implies about an 84% chance for a quarter point cut in the Fed funds rate target to 4%, according to Action.
"We suspect the FOMC will lower rates another 25 basis points given their risk management strategies, though rising inflation pressures could give the Fed pause," says Action.
In economic news Thursday, durable goods orders rose just 0.1% in November, well below the 2.0% rebound markets had expected. The tepid November gain comes after three consecutive monthly declines. Transportation orders rose 1.9%. Excluding transportation, orders were down 0.7%. Nondefense capital goods excluding aircraft fell 0.4% after a 2.9% drop in October. Shipments were flat, while inventories rose 0.8%. S&P economics notes that orders are down 0.3% over last year.
Meanwhile, weekly initial jobless claims rose 1,000 to 349,000, vs. market expectations of a decline to 340,000. Continuing claims jumped 75,000 to 2,713,000.
The Conference Board's consumer confidence index rose to 88.6 in December from
87.8 in November, above the decline to 86.5 expected by markets but well below the 110.0 seen a year ago. The present situations component fell to 108.3 from 115.7, while the expectations index rose to 75.5 from 69.1 in November. The data are a little better than expected, though they aren't likely to have much impact on markets, which are focused on geopolitical risks after Bhutto's assassination, says S&P Economics.
"Although consumer confidence improved in December on an uptick in the assessment of future economic conditions, the more objective employment indicators deteriorated in the month,” wrote Bear Stearns economist John Ryding in a Dec. 27 note. “The jobs indicators in this report, combined with the recent data on jobless claims, suggest only modest employment creation in December and, at this point, we project a payroll gain of
Traders were awaiting more clues on the direction of the economy on Friday, with the December Chicago purchasing managers’ index and November new home sales reports on tap.
In the energy market Thursday, February NYMEX crude oil futures rose 65 cents to $96.62 per barrel in late trading as the Energy Dept.’s weekly inventory report showed crude stocks fell by a greater than expected 3.3 million barrels to 293.6 million barrels. The assassination of Pakistan's Benazir Bhutto stirred up geopolitical fears in energy markets once again, reports Action Economics.
The dollar index fell 0.45 to 76.70 Thursday. S&P reports there was no flight to safety bid for the greenback on the Bhutto news.
Among Thursday's stocks in the news, shares of student loan company SLM Corp. (SLM) fell after the company said it is commencing concurrent public offerings of common stock and mandatory convertible preferred stock to raise a total of $2.5 billion of capital.
Shares of Citigroup (C), Merrill Lynch (MER), and JPMorgan Chase (JPM) were lower after Goldman Sachs reportedly increased fourth-quarter subprime mortgage writedown estimates for the three firms. Goldman says it now assumes writedowns of $18.7 billion for Citi (up from its previous $11 billion estimate), $11.5 billion for Merrill (from $6 billion), and $3.4 billion for JPM (from $1.7 billion before). Further, Goldman expects Citi to cut its dividend by 40% in 2008.
Fannie Mae (FNM) and Freddie Mac (FRE) were boosted by news that mortgage oversight body OFHEO classified both mortgage finance companies as adequately capitalized as of September 30, 2007. OFHEO reports Fannie had a 5.9% surplus above the OFHEO-directed requirement, which is 30% above the required minimum capital. Freddie's surplus above the OFHEO-directed requirement was 1.7%.
Document Science (DOCX) agreed to be acquired by EMC Corp. (EMC) in an $85 million deal. Document Science shareholders will receive $14.75 cash for each DOCX share.
European indexes finished modestly higher Thursday. In London, the FTSE 100 index rose 0.29% to 6,497.80. In Paris, the CAC 40 index added 0.24% to 5,627.48. Germany's DAX index gained 0.45% to 8,038.60.
Major Asian indexes finished mixed Thursday. Japan's Nikkei 225 index fell 0.57% and Hong Kong's Hang Seng index lost 1.02%, while Shanghai's benchmark index rose 1.44%.
Bonds surged on speculation the Fed will be forced to cut rates in January following Thursday’s weaker than expected data. There was also some flight to safety buying following the Bhutto assassination, which was evident in strong results for the Treasury's $13 billion 5-year note auction.
The 2-year Treasury note was up 05/32 to 100-02/32 for a yield of 3.222%, the 10-year note was up 23/32 to 100-17/32 for a yield of 4.191%, and the 30-year bond was up 1-08/32 to 106-15/32 for a yield of 4.601%.