US Market overjoyed with Federal Reserve’s big decision

Indices see their best day of the year as traders see their dream come true

Federal Reserve Chairman, Ben Bernanke shocked and cheered US market today, Tuesday, 18 September 2007, by cutting 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%.

The Dow Jones Industrial Average was trading higher by 70 points before Fed came out with its decision. Soon after the news hit the wires, the indices skyrocketed. The Dow Jones industrial Average closed higher by 336 points at 13,739.4. The Nasdaq Composite Index, finished higher by 70 points at 2,651.66. S&P 500 finished higher by 43.13 points at 1,519.78.

Twenty-nine out of thirty Dow stocks ended in green today. Financial stocks were in the forefront. Better-than-expected earnings report from Lehman Brothers also helped in fuelling the rally. Among other stocks, while P&G hit an all time high, GE scored a five-year high. Boeing was the sole laggard and the stock closed marginally lower.

The Dow's rise marked its largest one-day jump since 15 October, 2002, and its biggest percent rise since 2 April, 2003. All ten economic sectors posted gains today.

The Federal Open Market Committee meeting noted that today's action is intended to "forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."

Financials lead the rally after Fed cuts interest rate

When market opened in the morning, all 10 economic sectors were in positive territory. The Labor Department reported that wholesale prices fell 1.4% in August, led by falling food and energy prices. However, the core producer-price index climbed a greater than expected 0.2%.

Better than expected earnings news from the likes of Lehman Brothers, Best Buy and Kroger and the reassuring PPI report, helped market rally in the morning hours. Dow trading up by more than 130 points.

Lehman Bros. had a better-than-feared fiscal third quarter earnings report, topping the consensus estimate of $1.47 by seven cents. This gave the financial sector a good boost.

Then at 2.15 P.M, the Fed diction was out. The Fed directive did indicate that readings on core inflation have improved modestly but also ascertained that some inflation risks remain. The financial sector set the pace of the rally and was followed by consumer discretionary materials and industrials.

The FOMC also said that it is going to continue to assess the developments in the financial markets and will act as needed to foster price stability and sustainable economic growth.

Indian ADRs were also not left far behind in today’s rally. Indices registered gains between 2.5%-7.5%. VSNL and HDFC Bank topped the list gaining 7.8% and 7.6% respectively. Patni was a close third going up by 7.3%. MTNL, Infosys and ICICI Bank – all gained more than 5.3%. Wipro Technologies closed up by 4.4%.

Crude ends above $82 in after hours trading

Crude oil future prices surpassed $81/bbl at today’s close of regular trading and crossed $82/bbl in the after hours electronic trading. Prices got a boost after Federal Reserve cut interest rate as traders anticipated that this will boost energy demand across the country.

Crude-oil futures for light sweet crude for October delivery closed at $81.51/barrel (higher by $0.94/barrel or 1.2%) on the New York Mercantile Exchange. A potential storm risk in the Gulf of Mexico and speculation about falling inventories of fuel and fuel products in the past week also fuelled up crude price.

At the New York Stock Exchange, volume topped 1.6 billion shares, and advancing stocks outdid decliners nearly 10 to 1. At the Nasdaq, more than 2.1 billion shares traded hands, and advancers outpaced decliners nearly 4 to 1.

Tomorrow investors will again look for economic data to help set the tone of trading. The influential CPI report and August Housing Starts and Permits will garner notable interest given the persisting weakness in the US housing market. That will be followed by the Energy Dept.'s weekly inventories report at 10:30 ET. Morgan Stanley to come out with its earnings report.