[US Stocks] Wall Street will rally this week amid expected rate-cut move
Wall Street will rally this week if the powerful Federal Reserve chief Alan Greenspan delivers another deep interest rate cut. But don't count on the fireworks that followed his surprise half-point reduction early this month.
The pundits agree on one thing: Anything less than a half-point rate cut from the interest rate-setting Federal Open Market Committee (FOMC) after its Jan. 30-31 meeting, and the market will plunge.
"A 50 basis points cut will be friendly to the markets," said Tom Sparico, managing director of equities at Bengal Partners, a hedge fund. "If it is 25 points, Nasdaq will react very negatively, I can see it going to test lows ... and no rate cut will be a disaster to capital markets."
The rare January 3 inter-meeting Fed move caught traders right in the middle of lunch. The battered Nasdaq market -- the victim of the Great Crash of 2000 -- was looking for a lifeline, any lifeline.
Especially disappointed with a less aggressive rate cut will be the optimists bidding up the tech-heavy Nasdaq market since the start of this year after decline of nearly 40 per cent in 2000, largely on bets the sector's slowing earnings will improve as the economy picks up pace again later this year.
The Dow will also have a bad day, but will not face as much damage as Nasdaq. The blue chip index includes many cyclical or "economically sensitive" stocks that usually rally after any rate reduction.
On the economic calendar, the focus will mostly be on Friday's employment figures for January, which are expected to show the unemployment rate rose to 4.1 per cent from 4.0 per cent in December -- more confirmation of economic slowdown.
Aggressive monetary loosening would indeed send the right signal to the market, showing the central bank's intention to stop the economy from falling off a cliff by providing the liquidity to ensure economic activity is revived.
But it will not change the facts on the ground: the world's largest economy is cooling, and may in fact be headed to a recession, some fear. This is eating into corporate profits, a key driver of the stock market.
And the actual impact on the economy and the corporate bottomline will be not be felt for months to come.
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