Market Comment (16th March 2010, 16:30)

Wall Street got off to a lacklustre start, as caution over the Federal Reserve’s view on the US economy following today’s interest rate decision and a bigger-than-expected drop in US house starts weighed on the market.

The majority of investors are expecting US policy makers to keep the benchmark rate at a record-low range of 0-0.25% but there is an element of doubt as to whether the Fed will continue to reiterate its vow to keep interest rates ‘exceptionally low’ for an ‘extended period’.

In the previous meeting the Federal Reserve raised the discount rate but retained a dovish language, sending a mixed signal to the market and sparking an internal debate within the Federal Reserve.

Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, recently pushed for a modification in the ‘exceptionally low’ for an ‘extended period’ signal, saying that a change would give the Fed more flexibility to start raising rates and not shock the market should there be a need to raise rates in the short term.

A change in the wording or another unexpected rise in the discount rate may help the US dollar appreciate, and that is likely to weaken commodities and equities – so watch out!

The speech that follows today’s monetary policy decision may also touch on the government’s plans to unwind emergency liquidity measures. Many don’t expect the Fed to extend its buying of mortgage-backed securities, but any unexpected news on this subject could easily sway the market. The interest rate decision will be released at 6:15pm (London time).

Elsewhere, a drop in US housing starts today also weighed on stock market confidence at the beginning of the trading session. The Commerce Department showed housing starts plunging 5.9% to an annual rate of 575,000 in February, predominantly as a result a severe weather conditions over the month. But rising foreclosures have made it harder for housing inventories to fall - that naturally weighs on house prices and discourages new construction as well.

Meanwhile, building permits, a sign of future construction, fell 1.6% to an annual rate of 612,000 following a 4.7% drop in January.

Separately, US import prices for February declined more than anticipated while White House officials claimed that the US unemployment rate will remain elevated for an ‘extended period’ today.

By 3:40pm (London time) the Dow Jones Industrial Average was trading at 10673.51, representing a 31.36–point rise (+0.29%). At the same time, the S&P 500 advanced 6.03 points (+0.52%) to 1156.54 and the Nasdaq 100 climbed 9.33 points (+0.49%) to 1929.42.

Much of the improvement in stock market confidence came after Standard & Poor’s affirmed Greece’s BBB+ credit rating and moved it from its ‘creditwatch negative’ list – indicating Greece’s credit ratings is currently not at risk of being downgraded by S&P.

‘We view the Greek government’s total package of deficit- reduction measures as appropriate to achieve its 2010 fiscal target, given the deterioration in Greece’s growth prospects,’ wrote S&P’s Marko Mrsnik and Trevor Cullinan in a report today.

The news helped the euro rally against the US dollar, which bolstered the appeal of commodities. April light sweet crude (WTI) futures jumped 2.5% to $81.82 a barrel while April gold futures rose 1.8% to $1,125.2 per troy ounce and May high-grade copper futures rose 1.75% to $3.373 per pound.

Miners benefitted from rising commodity prices, with Freeport-McMoRan Copper & Gold up 1.4% to 81.79, Newmont Mining rising 3.2% to $51.33 and Barrick Gold 2.9% higher at $40.15.

Financials were also in demand after Senator Christopher Dodd outlined a ‘watered down’ plan to overhaul banking rules last night. Shares of Citigroup jumped 2.8% to $4, Bank of America rose 1% to $17.03 while insurer AIG rallied 4.8% to $35.98 after investor Bruce Berkowitz said he had brought a stake in the company.

Elsewhere, Victoria’s Secret and Bath & Body Works owner Limited Brands rallied 3.9% to $24.63 after reporting a special dividend and a share buyback while global coffee firm Starbucks climbed 3.8% to $25.36 after UBS raised its recommendation on the company from ‘neutral’ to ‘buy’.

Industrial giant General Electric helped lift the Dow meanwhile, gaining 2.3% to $17.69 on news that it would resume paying a dividend to shareholders in 2011.

Ford Motors edged 0.3% higher after Alan Mulally, the company’s chief executive, said he expected the carmaker to win market share in the US following Toyota's global product recall. UBS also upgraded the company’s target price to $15 from $13 and reiterated its ‘buy’ rating.

Healthcare shares bucked the positive trend today, however, after Goldman Sachs said the probability of healthcare overhaul legislation is greater than 50%. As a result, Goldman removed Teva Pharmaceutical Industries and UnitedHealth Group from its ‘Conviction Buy’ list. Shares of Teva Pharmaceuticals fell 1.3% to $60.16 while UnitedHealth edged 0.15% lower to $32.48.

Share this article

30 reads Add Comment

Comments

Comment here...

*      *

Tags

Tags: Barrick Gold, Dow Jones Industrial Average, Federal Reserve, Federal Reserve Bank, Freeport-Mcmoran Copper & Gold, NASDAQ 100, Newmont Mining, S&P 500