U.S. shares maintain heady gains in afternoon trade
By Julie Rannazzisi
CBS MarketWatch
Tuesday August 6, 2:48 pm Eastern Time
NEW YORK (CBS.MW) -- Stocks staged a powerful rally Tuesday as a surging dollar and growing confidence that the Fed would not hesitate to cut rates if warranted inspired buyers.
Lehman Brothers was the latest primary dealer to forecast the possibility of a 1 percent overnight rate by year-end. Goldman made the same prediction on Friday. The fed funds rate target currently stands at 1.75 percent.
A surge in the recently battered financial and tech sectors lit a fire under the averages right from the start of trading, with all but one of the Dow's 30 components trading higher.
All the market's sectors were awash in green, with chip, Internet, brokerage, oil service and retail shares taking the lead.
The Dow Jones Industrial Average (CBOT:^DJI - News) piled on 311 points, or 3.9 percent, to 8,355, ignited by huge rallies in Intel, Citigroup, AT&T, General Electric and American Express. Only McDonald's traded lower.
The Nasdaq Composite (NasdaqSC:^IXIC - News) zoomed 60 points higher, or 5 percent, to 1,266 and the Nasdaq 100 Index (NasdaqSC:^NDX - News) sprinted 54 points, or 6.3 percent, to 911.
On Monday, another session of unrelenting selling took the Nasdaq to a new closing low for the year.
The Standard & Poor's 500 Index (CBOE:^SPX - News) raced 4 percent higher while the Russell 2000 Index (CBOE:^RUT - News) of small-capitalization stocks rallied 2.9 percent.
Volume stood 1.06 billion on the NYSE and at 1.07 billion on the Nasdaq Stock Market. Market breadth was extremely positive, with advancers smashing decliners by 24 to 8 on the NYSE and by 22 to 11 on the Nasdaq.
Lehman calls for 1% fed funds rate
Lehman Brothers raised its Fed easing expectations, indicating that it has seen enough "economic and financial pain" to change its forecast.
The firm assigns a 60 percent chance that the Fed will slash the funds rate in the next several months.
"The precise dimensions of such a move are hard to pinpoint, but our main scenario is 25 basis points cuts at the September, November and December meetings, pushing the funds rate down to 1 percent," Lehman said.
"While the Fed does not directly target either the stock market or the credit market, it can't ignore the growing risk of major collateral damage to the economy. The more than 20 percent plunge in the stock market since mid-May has eliminated about $3 trillion in stock market wealth. The damage to credit markets is equally important [as] credit conditions in the corporate sector continue to tighten," Lehman told clients.
On Friday, Goldman Sachs economists revealed expectations that the Fed would slash rates by 75 basis points in the fourth quarter, bringing the overnight rate to 1 percent.
While short-term rates have witnessed furious buying interest and the Treasury yield curve vicious steepening over the past couple of weeks, Bridgewater Associates feels that short-term rates have still not "caught up" to deteriorating market action. See Fed rate cut story.
"In the best case-scenario, as equities start to rebound, we won't see any economic recovery until late this year. And by the time the Fed waits for confirmation -- the Fed will err on the cautious side -- there would be no tightening until next year," Bridgewater said.
The December fed funds futures contract implies a 1.50 percent funds rate by year-end, which means that a 25-basis-point ease is being factored in. "Given that the odds of tightening are virtually zero, there isn't enough of an easing skewed in," Bridgewater concluded.
Cisco the center of attention
All eyes are on tech benchmark Cisco Systems (NasdaqNM:CSCO - News) , which could set the tone for the sector in the coming days when it reports its quarterly results after the close Tuesday. Cisco was up just over 8 percent in recent action. Rival Juniper Networks raced up over 10 percent.
AOL Time Warner (NYSE:AOL - News) shed 0.2 percent, adding to four straight sessions of declines. The entertainment and media titan confirmed that it had named Jonathan Miller as the chief executive officer of its America Online unit. The online unit's accounting is being investigated by the Justice Dept. and the Securities and Exchange Commission. Shares had risen as much as 4 percent earlier in the session.
Lucent Technologies (NYSE:LU - News) ascended 5.2 percent, even after rating agency Standard & Poor's revised its outlook on the company late Monday to "negative" from "stable." S&P explained that Lucent faces "challenging market conditions, as the company's core customer base continues to defer purchases of new communications equipment." S&P added that the outlook reflects continued stresses in market conditions and increasing uncertainty as to Lucent's ability to return to profitability.
In the insurance sector, MetLife (NYSE:MET - News) posted late Monday second-quarter earnings that surpassed analysts' expectations, though the kingpin cautioned that 2002 targets could fall short of Wall Street's numbers as the stock market sell-off continues. Shares rose 1 percent, forfeiting early losses.
Among bank stocks, FleetBoston Financial (NYSE:FBF - News) rallied over 12 percent after falling over 5 percent on Monday. The company informed investors that it would host a conference call in the late afternoon to address the "volume of inquiries on various topics." Speculation that the company is a takeover target has picked up steam in the past weeks.
General Motors (NYSE:GM - News) rose 2.7 percent after the Dow company said it would start expensing employee stock options in 2003. The shift will cost the automaker 15 cents a share in 2003.
Read Movers & Shakers for the latest individual stock news.
Treasurys sell off dramatically
Government bond prices pulled back after a massive rally on Monday that took the 2-year note's yield to a record low of 1.89 percent.
Widening expectations that the Fed will have to pull the trigger and ease short-rates again has fueled the 2-year's ascent -- the Treasury security most closely linked to the fed funds rates. The futures markets are pricing in at least one 1/4 point rate cut by the end of the year.
This has produced significant yield curve steepening, all the more since the long end must contend with supply this week.
Treasury, in fact, sold $22 billion in five-year notes Tuesday afternoon and will offer $18 billion in 10-year notes on Wednesday. The refunding package, announced last week, was the largest since February 1996.
The 10-year Treasury note tumbled 1 5/32 to yield (CBOE:^TNX - News) 4.36 percent while the 30-year government bond cratered 1 9/32 to yield (CBOE:^TYX - News) 5.245 percent.
No economic stats were on Tuesday's agenda, with only a handful of mostly second-tier numbers due out later in the week. The most notable is the July producer price index, which will hit the tape on Thursday.
Wednesday will see the release of the July import and export price indexes, June wholesale inventories and June consumer credit.
In its latest assessment of U.S. economic conditions, the International Monetary Fund said it projected a gradual acceleration of GDP growth from 2 1/2 percent in 2002 to 3 1/4 percent in 2003. Growth in consumption is expected to moderate in mid 2002, the IMF said, and pick up in 2003 as income growth strengthens.
Business investment is a key vulnerability of the U.S. economy, the IMF noted, and a lack of a revival in final sales -- coupled with a lack of sustained improvement in corporate profits -- could stall an investment rebound.
In the foreign exchange sector, the dollar surged against the major currencies. Strategists attributed the dollar's rally to a mix of short covering and mounting worries over the growth prospects of the European economy.
Cornering the actual rates, the greenback soared 1.1 percent to 120.95 yen while the euro slid 1.5 percent to 96.55 cents. |
