After making a slow start for the week, US Market picked up good momentum during the course of the week ended Friday, 21 September, 2007 and made some solid gains for the week. The fed fund rate cut by Federal Reserve, few good earnings reports and positive economic news took the indices close to their all-time highs. But a weak dollar dented in some of the gains.
The Dow Jones Industrial Average gained 377 points for the week. Tech - heavy Nasdaq gained 69 points and S&P 500 gained 41 points.
The week started off with cautious trading on Monday, 17 September, 2007 as financial stocks were heavily hit after Bank of America acknowledged late in the session that credit market turmoil is expected to have a "meaningful impact" on its third quarter investment banking results. Dow lost 39 points on that day.
On Capitol Hill, central bank chief Ben Bernanke and Treasury Secretary Henry Paulson testified before a House panel on the mortgage markets situation. Bernanke warned that more delinquencies and foreclosures can be expected in the subprime, adjustable-rate mortgage market.
But the main story of the week was Federal Reserve’s Open Market Committee (FOMC) meeting on Tuesday, 18 September, 2007. Market applauded Federal Reserve’s unanimous decision of lowering fed fund interest rate (what banks charge each other for overnight loans and is the basis for everything from business loans to credit card charges) by 50 basis points from 5.25% to 4.75%. Though market was expecting a 25-50 bps cut in interest rate, traders knew that the chances of a 50 bps cut was really dim.
This was the first rate cut since June 2003. Bernanke and group clearly reiterated today that turmoil in financial markets was a threat to economic growth. The Fed also cut its discount rate (the rate it charges member banks and institutions for short-term loans) from 5.25% to 4.75%.
Market showed its reaction to this decision by soaring by huge points on that day and the following day, Wednesday, 19 September, 2007. On those two days, the Dow Jones Industrial Average gained 412 points. Nasdaq and S&P 500 added 84 points and 52 points respectively in their kitty.
On Thursday, 20 September, 2007, a disappointing guidance from Fed-Ex put a brake in the rally and took away some of the market’s ongoing momentum. Dow slipped by 50 points on that day.
But on Friday, 21 September, 2007, good earnings reports from Nike and Oracle helped market claim back all of Thursday’s losses. The tech sector provided influential leadership throughout the day with Oracle's reassuring report. Nike's earnings news offered support for the consumer discretionary sector.
Other than the above, better- than- expected earnings news from the likes of Lehman Brothers, Goldman Sachs, Morgan Stanley, Best Buy and Kroger helped overall market sentiment. Bear Strens and Circuit City were two names that missed on this front.
Among other economic data that were released during the week, Labour Department reported that consumer prices unexpectedly fell in August by 0.1%. It was the first decline in the Consumer Price Index (CPI) since October of last year. The CPI had risen 0.1% in July.
The core CPI, which takes out volatile food and energy prices, rose 0.2% from July, and was up 2.1% year over year, the lowest level in more than 2½ years.
The Commerce Department reported that U.S. housing starts and permits fell to a 12-year low in August, dropping 2.6% to an annualized rate of 1.331 million, slightly under the 1.35 million forecast by the market.
Executive Summary
For the week, the indices closed considerably up. DJIx was up by 2.7% and S&P 500 was up by 2.8%. Nasdaq was up by 2.7%. Federal Reserve cut interest rate by 50 bps to 4.75% and this enthralled traders. Better-than-expected earnings reports from brokerage firms made the situation further better.
History says that September is generally the worst month of the year, but till now, it seems that all’s well this year for US market in this month. For the year, Dow is up by 10.9%, Nasdaq is up by 10.6% and S&P 500 is up by 7.6%.
In the coming week beginning on Monday, 24 September, the economic calendar, remains heavy for the market. Consumer Confidence, Existing Home Sales, Durable Orders, the final Q2 GDP report, New Home Sales, and Personal Income and Spending data are expected to set the tone for trading.