Wall Street stocks endured another volatile session after central bank measures designed to alleviate money market funding pressures failed to sustain an early rally amid a series of cautionary statements from US banks.
The Fed’s announcement of a new auction facility and foreign exchange swap lines with other central banks sparked an initial rebound in equities but weakness in the banking sector later caused the market to give up most of its gains.
Financials lost steam in spite of a central bank policy announcement designed specifically to help them.
“Right now the market is trying to tell the Fed that they have not done enough,” Ryan Larson, senior equity trader at Voyageur Asset Management, said.
Confidence waned after Bank of America, Wachovia and PNC Financial Services all made negative statements on the fourth quarter,
“When you saw the financials turn negative around midday you got a pretty good sign that those gains might not be sustainable,” Mr Larson said.
The S&P 500 rose as much as 2.3 per cent but closed up only 0.6 per cent at 1,486.60 having briefly turned negative in afternoon trade.
Strength in technology stocks initially propelled a big rally on the Nasdaq Composite but it closed up only 0.7 per cent at 13,473.90.
The Dow Jones Industrial Average closed 0.3 per cent higher at 13,473.90, having recorded a 380-point intraday swing.
Stocks had slumped the previous day after a 25 basis point rate cut from the Federal Open Market Committee failed to appease nervous investors. Financials and homebuilders had suffered particularly severe losses.
The S&P financial index rose as much as 2.9 per cent on Wednesday but again closed lower, down 0.9 per cent at 401.85.
“There is going to be a lot of liquidity but is this going to solve all the problems?
I don’t think so,” Peter Cardillo, chief market economist at Avalon Partners, said.
Bank of America’s chief executive warned fourth quarter results would be “disappointing” and said the bank would set aside $3.3bn to cover losses and writedowns. The shares fell 2.7 per cent to $43.43.
Wachovia, down 3.4 per cent at $40.53, estimated its loan-loss provision for the fourth quarter at $1bn in excess of charge-offs, about double its previous forecast.
PNC Financial Services, a US regional bank, warned it would report lower than expected fourth-quarter earnings. The shares fell 3.6 per cent to $68.25.
Citigroup shares lagged after a disappointing reception for Vikram Pandit, its newly appointed chief executive. The shares fell 5.3 per cent to $31.47 on Wednesday, down 11 per cent since the announcement.
Sallie Mae, the student loan company, fell 10.8 per cent to $28.49 after it lowered its core earnings outlook and said a buy-out consortium led by JC Flowers was unwilling to submit a new takeover proposal. MGIC Investment, the mortgage insurer, fell 4.4 per cent to $25.12 after Goldman Sachs told investors to sell the shares.
Retailers also showed weakness after Office Depot, down 11.5 per cent $15.04, warned of a weak fourth quarter. The sectors which benefited most from the Fed’s money market moves were those that have this year typified the so-called “globalisation trade”: energy, materials, industrials and technology. Traders bet that any improvement in liquidity would see funds channelled towards companies perceived as having better exposure to overseas economic growth.
“If this is the beginning of the end of the financial crisis, growth abroad will not be threatened and people will be piling on to the globalisation trade again,” Brian Gendreau, strategist at ING Investment Management, said.
The S&P energy index rose 2.4 per cent to 587.72 as crude oil prices climbed above $93 a barrel. A range of oil companies including Exxon Mobil, up 1.8 per cent at $91.92, made strong gains after Goldman Sachs sharply raised its outlook for crude prices next year.
In the technology sector, Hewlett Packard, 3.1 per cent higher at $37.95, and IBM, up 1.4 per cent at $108.47, were among the Dow’s best performers. AT&T, up 5.7 per cent at $41.71, continued in stellar form after it raised its dividend the previous day.