Wall Street closed on a mixed note after volatile trading on Monday, while investors remained uncertain about the size of an expected rate cut from the Federal Reserve next week.
After a brief rally during the afternoon, the S&P 500 closed down 0.1 per cent at 1,451.70. The Nasdaq Composite fell 0.3 per cent to close at 2,559.11, while the Dow Jones Industrial Average rose 0.1 per cent to 13,127.85.
The yield on the two-year note was lower at 3.85 per cent, implying a series of sharp rate cuts in the 5.25 per cent Fed funds rate starting next week, when the Federal Reserve holds its scheduled policy meeting.
Several Fed officials delivered speeches on Monday. Janet Yellen, president of the San Francisco Fed, said financial turmoil had raised risks for the economy and warned: “Monetary policy should not be used to shield investors from losses.”
In spite of the rebound in stocks on Monday, the August jobs report, which revealed the first monthly decline in jobs for four years last week, has raised concern among investors that the housing recession is starting to hurt the broader US economy.
Anthony Conroy, managing director at BNYConvergEx, said: “Everyone is talking about recession, the payroll number was terrible”.
Equity volatility as measured by the Chicago Board Options Exchange rose 5.2 per cent to 27.58, following a 9.3 per cent jump on Friday.
Mr Conroy said: “The rise in Vix is telling you that people expect further bad news.”
Financial stocks were in the spotlight on Monday and buyers of investment banks emerged during the afternoon as crowded short positions were cut said traders. Among banks in the news, Bear Stearns rose 2 per cent to $107.50 and traded at a high of $109.56. News that Joseph Lewis, a UK billionaire has accumulated a 7 per cent stake boosted the investment bank which has fallen more than 35 per cent this year as problems in the subprime mortgage market have intensified. In a filing with the U.S. Securities and Exchange Commission, Mr Lewis disclosed the purchase of some $860m in stock.
Weakness in the sector early on Monday reflected fear among investors that banks would largely have to fund the commitments of investment vehicles that could no longer raise finance from commercial paper investors.
Over the past four weeks, the asset-backed commercial paper has shrunk by nearly 20 per cent and this has pushed money market rates well above their usual levels. Although money rates fell slightly on Monday, they remain at elevated levels when compared with the investors’ expectation of rate cuts.
Beyond the shrinking CP market, banks also face a $300bn backlog of unsold high-yield loans and bonds.In the worst case scenario, banks could be left holding this debt on their balance sheets if investors resist their overtures.
There was a sign that the expected sale of $14bn in loans that would help fund the $26bn buy-out of First Data, the largest US payment processor, appeared closer to fruition.
Kohlberg Kravis Roberts, the buy-out firm behind the deal, has reportedly agreed to the loans having covenants that would provide some protection for buyers of the debt. Shares in FDC rose 0.2 per cent to $33.29, below KKR’s agreed purchase price of $34.
Analysts at CreditSights said Citigroup had the greatest exposure in dollar terms among the big three US commercial banks to any markdown in the value of their mortgage-related retained interest and leveraged loans. CreditSights had reduced earnings estimates for Citi, JPMorgan and Bank of America, but said the big banks were more insulated to such exposures than other institutions.
CreditSights said it considered the big banks as havens of quality in the financial sector, retaining the longer-term advantages of diversity and sizeable deposit funding.
Shares in Citigroup fell 0.4 per cent at $45.30, a fall of 18.7 per cent for the year. JPMorgan gained 0.9 per cent to $43.93, paring its decline in 2007 to 9 per cent, while Bank of America fell 0.1 per cent at $48.96, taking its loss for the year to 8.3 per cent.
Traders noted buying of put options on Citigroup on Monday. “It is possible they could be aggressively hedging long stock positions, or speculating on continued weakness over the next month,” said analysts at Susquehanna Financial Group. The options expire a day before the bank releases its third-quarter results on October 19. Countrywide declined 5.5 per cent to $17.21, after a slide of 4 per cent on Friday. The largest US mortgage lender plans to cut upwards of 12,000 jobs over the next three months.
The beleagured S&P homebuilder index fell 2.9 per cent and has now fallen two-thirds in value from its peak in 2005. While investors waited for a lower Fed funds rate this month, the dollar came under further pressure.
The dollar index, which measures the dollar against a basket of currencies, extended Friday’s decline below 80 to a fresh 15-year low. For now, the weak dollar has helped boost the appeal of large multinational companies, such as those in the technology sector, analysts said.
The Nasdaq 100 index is up 11.6 per cent this year, well ahead of the S&P’s rise of 2.4 per cent.
“There is an increasing sense that the global technology ‘cycle’ has become somewhat disconnected from the wider economic cycle,” Lehman Brothers said. “At the foot of the technology food chain, the semiconductor “space” has begun to experience an improvement in revenue growth, just as other measures of global economic activity have been weakening.”
Advanced Micro Devices rose 2.6 per cent to $12.94 after it launched its latest server computer chip.
Intel reversed a rise to $26.22 in early trade after boosting its sales outlook. The stock fell 0.5 per cent to close at $25.35.