The New York Times
By Michael M. Grynbaum
Published: January 23, 2008
Wall Street endured another volatile day on Wednesday as stocks plunged at the opening bell, spent much of the session in negative territory, then erased a 326-point deficit in the afternoon to post strong gains in the final hour.
“The market has this out-of-control feeling, and until the market sees some semblance of stability, it’s going to continue to be very volatile,” said Richard Sparks, senior equities analyst at Schaffer’s Investment Research.
After diving nearly 250 points in the opening minutes, the Dow Jones industrial average came back to nearly even in the first hour, only to fall again sharply. In the early afternoon, the average was off 326 points. But by 2:30 p.m., it was showing a slight gain for the day.
At 3:30 p.m., the Dow was up 220.21 points, to 12,191.40, a gain of 1.8 percent. The broader Standard & Poor’s 500-stock index was up 1.5 percent, and the Nasdaq composite index, dragged down for most of the day by technology stocks, was up 0.9 percent.
Motorola and Apple forecast lackluster profits, raising fears about corporate profits as investors remained uneasy about the possibility of a recession. The
companies’ shares were down about 15 percent.
“Apple is basically a bellwether,” said David Kovacs, a quantitative strategist at Turner Investment Partners in Berwyn, Pa. “If a company such as Apple cannot withstand a slowdown, then what is the fate of all other companies?”
But other stocks, including those of many financial companies and some manufacturers, found favor among traders, a day after the Federal Reserve surprised investors with an aggressive, unscheduled interest rate cut.
Futures markets are predicting another three-quarter-point cut to interest rates when the Fed meets next week, though some market participants said the central bank’s surprise move on Tuesday had confused investors’ expectations.
The volatility on Wall Street came with the market at a 15-month low. And it followed another steep sell-off in European stock markets, which were disappointed after the head of the European Central Bank dampened investors’ hopes that the bank would follow the Fed’s lead in cutting interest rates.
Global stocks remained highly volatile a day after the Fed’s emergency interest rate cut on Tuesday. Asian shares gained sharply after a two-day mauling, and many European markets opened with modest gains, in part on hopes for a rate cut in Europe. But the chief European central banker, Jean-Claude Trichet, indicated in Brussels that no monetary easing was in the cards.
“In demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets,” Mr. Trichet told the European parliament, according to Reuters.
Mr. Trichet’s remarks, combined with signals from the Bank of England, the Bank of Japan and others that they intended to hold rates steady, sent major European indexes sharply lower, and overnight trading in American index futures signaled that Wall Street would open lower as well.
At the close, the CAC 40 in Paris was down 4.3 percent, the DAX 30 in Frankfurt was down 4.9 percent, and the FTSE 100 in London was off 2.3 percent.
Eric Chaney, chief economist for Europe at Morgan Stanley in London, said the market was “impatient” for a European rate cut, but that Mr. Trichet’s comments were not quite as hawkish as some seemed to think.
“The E.C.B. had a tightening bias previously,” Mr. Chaney said, but “Trichet left open the possibility of a move toward a neutral bias.”
Even so, he said, European investors were unlikely to get any short-term relief from the bank, as “news from the real economy in Europe is very good,” and “we would have to see some bad news from the real economy rather than the markets,” before policy makers cut rates there.
Some traders questioned whether the Fed itself had overreacted.
“The Fed rate cut was both bigger and earlier than people expected,” said Manuel Martin, an equity strategist at WGZ Bank in Frankfurt. “Now people are starting to ask, ‘Is the U.S. economy really that bad off?’ ”
The strong rises on Asian indexes Wednesday reflected buying by speculators to cover short positions, and a sense that shares in the region had fallen more than was justified. Hong Kong’s Hang Seng index, which experienced the biggest drops in Asia this month, led the region’s rebound, soaring 11 percent on Wednesday after the central bank there matched the Fed’s rate cut — an expected move, since the Hong Kong dollar is pegged to the United States dollar.
In China, the CSI 300 index rose 4.7 percent; in Japan, the Nikkei 225 gained 2 percent; in India, the Sensex, another of the biggest losers in the past two days, closed 5.6 percent higher on Wednesday. The Australian stock markets halted a 12-day losing streak.
But the gains on Asian markets were not big enough to erase the losses suffered there in recent days, as worries about the possibility of a crippling recession in the United States swept the globe.
“The system which supported the U.S. credit markets has collapsed,” said Yuuki Sakurai, director and general manager of the financial and investment planning department at Fukoku Mutual Life Insurance in Tokyo. “Merely easing rates will not solve the root problem,” which was that the problems in the mortgage market had upset “standard measures of investment.”
Larry Jones, chief investment officer at Nedgroup Investments, said, “The basic U.S. economic problems are not over, and a lot of them are ahead of us.”
The recent nosedive in Asian markets shows that even if the fast-growing economies of Asia are able to avoid a slowdown from the problems in the United States, the region’s high-flying stock markets will not, he said.
Central banks in Asia faced the question of whether to follow America’s lead on interest rates or Europe’s.
“You have to stay in tune with the developments with the rest of the world,” the Asian Development Bank managing director, General Rajat Nag, told Reuters on Wednesday. “However, I think central banks in the region have to keep an eye on the inflation front as well,” he added.
Australia’s treasurer, Wayne Swan, said he welcomed the Fed’s move, while predicting that the domestic economy would remain strong despite any U.S. slowdown.
“It’s pretty fair to say that Australians can be confident that the prospects for growth in Asia and developing regions will help us withstand the fallout from the events in the United States and elsewhere,” he said.
Fred Zhang, a stock broker at Mansion House Securities in Hong Kong, said that Hong Kong investors were particularly encouraged by the Federal Reserve’s interest rate cut because of the correlation between currencies. Mr. Zhang said that while many investors were still worried, he was optimistic about the short-term prospects for the Hong Kong market.
“I think it will keep going upward,” he said.
After days of losses, “Asian markets were looking for a reason to move back” to prices that represent the fundamental numbers underlying them, said Subir Gokarn, Standard & Poor’s chief economist in Asia. Now investors need to overlook “the panic and the froth, and see what the reality is,” he said.
Source: New York Times
Stocks Surge, Erasing Big Losses, at End of Volatile Day
