U.S. stocks trip a tiny bit as world markets regain footing
NEW YORK -- U.S. stocks closed fractionally Monday after the Federal Reserve and other central banks added more cash to their banking systems, helping investors set aside some concerns about credit tightness.
The New York Fed, which carries out the central bank's market operation, minutes after the opening bell announced $2 billion in overnight repurchase agreements.
The Fed's "repo" followed a move by the Bank of Japan to put $5 billion into the markets and an addition by the European Central Bank of $65.3 billion; the ECB added more than $200 billion last week. The moves, following similar injections by the Fed last week, appeared to placate Wall Street for now and allowed it to look ahead to a week of fresh economic data. Since Thursday, the Fed has added $62 billion in liquidity.
Monday's injection, however, was smaller than normal, perhaps reassuring some investors that the central bank doesn't yet feel the need to pump more liquidity into the market. The last time the Fed repurchased as little as $2 billion in one day was on April 18. It made a one-day repo of $1.5 billion on May 10, but that was preceded by a separate one-day repo of $5.0 billion earlier that same day.
Indeed, the central bank moves seem to be calming a market that has been torn by volatility for weeks.
"The environment we're in is really truly extraordinary. The best way for investors to view this is from a 30,000-foot view — to be positioned defensively and to continue to pay close attention to the U.S. economy and the consumer," said J. Michael Barron, chief executive of Knott Capital in Exton, Pa.
At the close of trading, the Dow Jones industrial average was off 4.14, or 0.03%, at 13,235.40.
The Standard & Poor's 500 index fell 0.72, or 0.1%, to 1452.92, and the Nasdaq composite index lost 2.65, or 0.1%, to 2542.24.
After enduring sharp swings to the downside last week, the Dow Jones industrials and other major indexes ultimately finished the week with a modest gain. Last week's trading showed that the most predictable thing about the markets lately is high volatility.
Investors were in a better humor Monday, despite the great deal of uncertainty in the market over the extent of problems in the subprime mortgage sector. Defaults among subprime mortgage holders — borrowers with weak credit — began the chain of events that led to the turmoil on Wall Street and other stock markets in recent weeks.
Investors appeared pleased with the U.S. Commerce Department's report that retail sales edged up 0.3% in July, slightly ahead of market expectations. Wall Street has been closely monitoring consumer spending, as it accounts for two-thirds of total economic activity.
The panic started after a major French bank, BNP Paribas, last Thursday froze three of its investment funds because it couldn't put a value on their holdings of securities backed by shaky U.S. mortgages. The bombshell raised fears that other international banks were vulnerable to the collapse of the "subprime" mortgage market in the United States. Dodgy mortgages have been packaged by U.S. investment banks into securities and sold to banks and investors around the world.
As U.S. housing prices have fallen, mortgage defaults have risen – and securities backed by subprime mortgages are considered so toxic that no one will buy them. "A lot of American investment banks have been very efficient at placing this low-quality paper around the world," says investment adviser Marc Faber, publisher of The Gloom, Boom & Doom Report newsletter in Hong Kong.
Central banks have been pumping money into financial markets to make sure credit remains available and to reassure investors.
Investors also started wondering Monday whether last week's panic selling was an overreaction. Chi Lo, chief economist at Ping An of China Asset Management, said Asian markets were jittery because stocks had risen to precarious heights this year: Hong Kong's Hang Seng, for instance, was up 12% in 2007 before Friday's sell-off. At those levels, it didn't take much to persuade investors to sell and take some profits.
"Today has been a little calmer, though people are still somewhat shaken" said Deborah Schuler, regional credit officer for the Moody's credit rating agency in Asia.
Schuler says Asian banks have few loans or investments in U.S. mortgages: They were mainly focused on lending in booming economies at home in Asia. "We haven't cut any (Asian bank credit) ratings, and we don't expect to," she said.
Before announcing its latest liquidity injection, the Fed said Monday it stood ready to supply more liquidity to the market. The federal funds rate traded at the central bank's target 5.25%; last week, a fed funds rate of about 6% triggered cash injections last week.
Overseas Monday, Japan's Nikkei stock average gained 0.2%. European stocks showed sharp gains after a sell-off Friday. Britain's FTSE 100 jumped 3%, Germany's DAX index added 1.8%, and France's CAC-40 rose 2.2%.
The dollar was mixed against other major world currencies. Gold futures fluctuated, while oil futures rose. Light, sweet crude rose $1.13 to $72.60 per barrel on the New York Mercantile Exchange.