Wall Street endured another volatile session on Tuesday after a large loss at Freddie Mac, the mortgage agency, reinforced worries about credit-losses in the financial sector.
Energy and mining stocks were buoyed by a spike in commodity prices, with crude oil futures closing at a record high above $98 a barrel.
Some strong results from Hewlett-Packard cheered harried investors early in the session but confidence waned after poor housing data hit homebuilder stocks.
Minutes from the Federal Reserve Open Market Committee’s October meeting, released in mid-afternoon, provided little encouragement to traders betting on future rate cuts, referring to last month’s decision to ease as a “close call”.
However, the futures market continued to price in a rate cut next month after a new quarterly Fed report on the outlook for the US economy cautioned that GDP growth would slow next year while unemployment could rise slightly, while inflation was expected to remain moderate.
The Dow Jones Industrial Average posted a 268-point intraday swing but closed only 0.4 per cent higher at 13010.14. The S&P 500 opened strongly, then fell as much as 1 per cent, before closing up 0.5 per cent at 1439.70 .The Nasdaq Composite rose 0.1 per cent at 2596.81.
Traders have become accustomed to these large intra-day share price movements.
“If anyone out there with sizeable capital goes in at the end of the day, and goes either long or short, all the speculators out there tend to jump on board. That exacerbates the move,” Randy Frederick, director of derivatives at Charles Schwab said. “They are desperately scared of being caught on the wrong side of it,”
The CBOE Vix index fell 4.2 per cent at 24.9 on Tuesday but remains elevated, amid continued expectations of share price volatility.
Some terrible results from Freddie Mac, the government sponsored mortgage company, provided a further blow to confidence in the financial sector on Tuesday.
Freddie’s third-quarter net loss widened sharply to $2.03bn as it set aside $1.2bn to account for bad home loans. The shares plummeted 28.7 per cent to $26.74 after it said it was “seriously considering” cutting its dividend by half to raise capital. Shares in fellow mortgage lender Fannie Mae fell 24.8 per cent at $28.25, leaving them almost 60 per cent below their high this year.
Countrywide Financial, suffered sharp falls after an analyst said funding shortages at Fannie and Freddie could hurt the largest US mortgage lender. But the shares rallied to close only 2.7 per cent lower at $10.28 after the mortgage lender said persistent rumours that it could go bankrupt were “absolutely false.”
Citigroup fell 1.9 per cent at $31.40 after Deutsche Bank analyst Mike Mayo cut his price target to $29. He said “recent problems with CDOs and their lack of disclosure reflect a serious risk management break-down” and could prompt regulators to impose restrictions “such as the inability to pursue acquisitions”.
Elsewhere trading was extremely choppy.
Hewlett-Packard reported a 28 per cent leap in fourth-quarter net income, while sales rose 15 per cent and were nearly $1bn higher than Wall Street had anticipated. The stock closed up 0.2 per cent at $49.56. Google clung on to a 3.6 per cent gain at $648.54 after Credit Suisse raised its price target to $900.
Retailers were also in focus amid contrasting quarterly corporate performance.
Target’s third-quarter earnings slid 4 per cent, missing expectations. The shares fell 4.1 per cent to $51.69 even as the discount retailer announced a new $10bn share buy-back programme. Office Depot, lost 7 per cent at $17.48 after quarterly profit fell 9 per cent. But Nordstrom surged 12.1 per cent to $34.21 after its quarterly earnings increased more than anticipated.
There was more bad news for the real estate sector. Although housing starts rose a surprising 3 per cent in October, building permits were 6.6 per cent lower, more than expected.
“Despite the increase in starts in October, there is no evidence here of housing market stabilisation,” economists at Bear Stearns said.
Shares in the big homebuilders felt heavy selling pressure, although DR Horton, which swung to a fiscal fourth-quarter loss, closed 2.5 per cent higher at $11.53. The S&P homebuilder index shed 5.2 per cent at 326.12.
