US stocks rebounded on Tuesday after a sharp sell-off in the previous session left major indices reeling 10 per cent below their recent peak.
Citigroup’s announcement of a new capital injection from Abu Dhabi appeared to cheer the market, however traders said bargain-hunting drove much of the uptick after selling became exaggerated the day before.
Stocks rallied even as investors were faced with a fresh batch of depressing economic data. An index of house prices recorded a sharp decline while a measure of consumer confidence hit a two-year low.
The S&P 500 closed 1.5 per cent higher at 1,428.23. The move marked a rebound from the previous day’s rout which saw the index briefly turn negative for the year and fall more than 10 per cent from its record high in October – a technical “correction” in stock-market parlance.
“I think it’s a technical bounce from a very oversold market condition,” Peter Cardillo, chief market economist Avalon Partners, said.
The Dow Jones Industrial Average rose 1.7 per cent to 12,958.44 while the Nasdaq Composite gained 1.6 per cent to 2,580.80.
Financials, healthcare and industrials led gains while energy stocks were weakest as the price of crude oil retreated. Hess fell 2.9 per cent to $66.39 while National Oilwell Varco declined 3.4 per cent to $64.61.
A $7.5bn investment in Citigroup from the Abu Dhabi Investment Authority dominated market chatter on Tuesday, underscoring the bank’s efforts to shore up its overstretched balance sheet.
“The move represents part of the solution applying excess global liquidity to buy depressed and or illiquid assets although it does not represent a silver bullet for Citi let alone the heavily damaged financial intermediation pipeline,” said TJ Marta, strategist at RBC Capital Markets.
Citi’s shares rose 1.7 per cent to $30.32 but still underperformed many of the other leading banks, However volatility in the trading of Citi options fell, as risk perception declined.
A range of banking and other financial stocks posted much stronger gains as traders went bargain-hunting in the heavily shorted sector. Lehman Brothers rose 4.3 cent to $59.90 while Morgan Stanley gained 3.9 per cent to $49.80.
However, MBIA, the bond insurer, fell 7.9 per cent to $30.46 after it said it was winding down a structured investment vehicle.
The financial sector of the S&P has fallen 22.4 per cent so far this year and as the largest group on the index its demise has weighed on the broader market.
In contrast, consumer staples, considered a recession-proof sector, have risen
10.3 per cent in 2007.
Goldman Sachs on Tuesday lowered its ratings on several sectors of the US stock market, including software, automobiles and airlines. Goldman said the chances of a US recession had increased to 40-45 per cent from 30 per cent a few months ago.
Goldman also said it expected the Fed funds rate to bottom out at 3 per cent in the next six to nine months, revised from a previous forecast of 4 per cent.
The futures market continued to price in a December quarter-point easing, even as Charles Plosser, Philadelphia Federal Reserve president, played down the odds of another cut.
In economic news, the Case-Shiller index of home prices fell a record 4.5 per cent nationally in the third quarter, compared with the same period a year earlier.
The S&P homebuilder index fell 1.3 per cent to 291.55 after plummeting 7.2 per cent the previous day. Pulte Homes declined 0.9 per cent to $9.08 in spite of reaffirming its fourth-quarter outlook.
A gauge of consumer confidence fell to its lowest level for two years. Stocks dipped briefly after the Conference Board’s consumer confidence index dropped to 87.3 this month, from a revised 95.2 in October, substantially worse than expected.
Semiconductor stocks were broadly higher on Tuesday but shares in Advanced Micro Devices hit a four-year low, falling 1.2 per cent to $10.15, after an analyst downgraded the stock. Intel rose 3 per cent to $25.11 after JPMorgan raised its earnings estimates.
In earnings news, Talbots, the clothing retailer, swung to a $9.4m loss in the third quarter but the results were better than anticipated and the shares rose 6.4 per cent to $14.02.
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