US Market applauds another rate cut

Indices react late to Federal Reserve’s decision on cutting fed fund rate and discount rate

US stocks rallied today, Wednesday, 31 October 2007, after the Federal Reserve cut interest rates (fed fund rate and discount rate) by 25 bps and 50 bps respectively. The cut in interest rate came for the second time in six weeks and as per the Federal Reserve Chairman, it was aimed to help the economy weather stress from the housing slump and a weakening financial system. Better than expected read on third quarter growth also added fuel to today’s rally.

Though market was acting in a bullish tone since the morning hours today, stocks slipped initially once Federal Reserve’s decision was out at 2.15 pm E.T. After some time, they made a U-turn and picked up momentum. The Dow Jones industrial Average closed higher by 137 points at 13,792. The Nasdaq Composite Index, finished higher by 42 points at 2,859. S&P 500 finished higher by 18 points at 1,549.

Twenty-eight out of thirty Dow components ended in green today. Microsoft led the team of Dow winners and the stock reached a six-year high today. Verizon was another top winner. Wal-Mart was one of the two laggards. All ten economic sectors posted gains today, led by the energy sector.

The Federal Open Market Committee gave the market what it wanted when it decided to cut the fed funds rate and discount rates by 25 and 50 basis points each to 4.5% and 5% respectively.

The financial sector played an influential role in driving the late-afternoon rally today but it was mainly the Technology sector that was in the forefront. Apart from Microsoft, there was Apple and Google. Google shares crossed the $700 mark for the first time.

Wal-Mart shares were down today after the world's largest retailer said that it would start its holiday discounting early. But Verizon shares were up on reports that the company was in talks with Google to come out with a product against Apple’s iPhone.

Third quarter real GDP figure surprises investors

On the economic news front, third quarter real GDP rose at a 3.9% annual rate. Further good news comes from the fact that GDP deflator (inflation measure) was up at just a 0.8% annual rate in the quarter. The figures were quite surprising in nature given the nature of housing slump and sub prime mess market has witnessed this quarter.

On the other hand, the October Chicago Personal Manufacturing Index, a regional manufacturer survey, slipped to 49.7 as against an expected figure of 53.0. A number below 50 indicates a decline in manufacturing.

The earnings reports that poured in today was good. Among others, Kraft and MasterCard topped expectations.

Indian ADRs closed mixed today. HDFC Bank and ICICI Bank were the main winners gaining 6.5% and 4.6% respectively. VSNL and Patni Computers were the main losers shedding 7.8% and 5.8% respectively.

Unexpected drop in crude inventories taking fuel inventories to two-year low level sent crude prices to a new all time high today. Prices crossed and closed above the $94/barrel mark for the first time ever. A falling dollar just aggravated the situation further. Till yesterday, traders had speculated that this week’s energy inventory report is expected to show rise in US crude inventories.

Crude-oil futures for light sweet crude for December delivery closed at $94.53/barrel (higher by $4.15/barrel or 4.6%) on the New York Mercantile Exchange. Prices rose to $94.74/barrel today earlier in the day during intraday trading. Prices are up 61% on a yearly basis. Futures prices for petroleum products and natural gas also rose today. Oil rose 16% in October, the biggest one-month gain since September 2004.

Volume on the New York Stock Exchange neared 1.6 billion, and advancing stocks ran ahead of those declining nearly 3 to 1. On the Nasdaq, more than 2.5 billion stocks exchanged hands, with advancers edging ahead of declining stocks almost 2 to 1.