Stocks fall as Wall Street tries to assess Federal Reserve's next

0 Comments | Deseret News (Salt Lake City), Aug 20, 2007 | by Joe Bel Bruno Associated Press

NEW YORK -- Wall Street pulled back Monday as demand for 3-year Treasury bills fell sharply, suggesting Wall Street was pessimistic about where interest rates are headed and unsure of what the Federal Reserve's next move will be.

Trading had fluctuated for much of Monday's session following the market's big rally Friday in response to the Fed's lowering of its discount rate, the interest it charges on loans to banks. The Fed said it stood ready to make further moves to keep credit market losses from hurting the economy, but because it stopped short of a cut in the more important federal funds rate, uncertainty remained on Wall Street about the policymakers' intentions. The Fed is not scheduled to meet formally until Sept. 18, which means investors could remain jittery until then.

The big rise in demand for T-bills showed that investors were looking for a short-term, relatively safe place for their money while the interest rate environment is sorted out.

"Its a very trying market right now, and we're trying to hold on to some of the early gains, but there's a lot of uncertainties out there," said Peter Cardillo, chief market economist at New York- based brokerage house Avalon Partners. "The question is if the Fed did enough to satisfy the markets, and Wall Street will be relentless until they cut the fed funds rate."

Treasury bonds, which have rallied in recent weeks as investors fled to safe-haven securities, continued to move higher overall Monday. Bond prices move opposite yields. Yields on the benchmark 10- year Treasury bond fell to 4.62 percent from 4.68 late Friday, while the 3-year T bill saw yields fall more than 100 basis points, or 1 percentage point, to 4.07 percent.

Analysts also questioned how much conviction buyers had, as much of the previous session's rally was pinned on big institutional investors like hedge funds buying shares to cover their positions. Some investors had been shorting the market -- betting stocks would move lower -- and were caught off guard when the central bank cut the discount rate.

Right after the market opened Monday, the Fed also announced it injected another $3.5 billion into the banking system. The central bank has infused the market with nearly $120 billion of liquidity since last week.

"It's a very trying market right now, and we're trying to hold on to some of the early gains, but there's a lot of uncertainties out there," said Peter Cardillo, chief market economist at New York- based brokerage house Avalon Partners. "The question is if the Fed did enough to satisfy the markets, and Wall Street will be relentless until they cut the fed funds rate."

In early afternoon trading, the Dow Jones industrials fell 64.87, or 0.50 percent, to 13,014.21. The blue chip index spent most of the morning bouncing into and out of positive territory.

Broader indexes fell. The Standard & Poor's 500 index fell 10.68, or 0.74 percent, to 1,435.26; the Nasdaq composite index fell 8.49, or 0.34 percent, to 2,496.54.

Light, sweet crude fell $1.48 to $70.50 on the New York Mercantile Exchange. Investors have been wary as Hurricane Dean heads toward Mexico, where major oil companies have already begun battening down oil rigs in the Gulf of Mexico.

The dollar was mixed against major currencies, while gold prices fell.

This week will be light on economic reports, which makes it a bit more difficult for investors to assess what the Fed might do at its rate-setting meeting. In one economic reading that arrived Monday, the Conference Board said its gauge of future economic activity moved slightly higher in July.

The research group's index of leading economic indicators rose 0.2 percent in July, less than the 0.4 percent analysts were expecting. The index fell 0.3 percent in June, after rising 0.2 percent in May. The report is designed for forecast economic activity over the next three to six months.

Also Monday, the Chicago Federal Reserve was expected to release its July index on national business activity.

With earnings season mostly wrapped up, there was little in the way of corporate news for investors to trade off of. August is typically one of the slowest periods for equities markets.

Among the sectors leading the market lower is financial stocks, which spiked on Friday after the Fed announcement. The downtrodden sector stands to benefit from the Fed's discount rate cut. Goldman Sachs Group Inc. fell $3.52, or 2 percent, to $171.48, while Citigroup Inc. dropped 59 cents to $48.22.

Lowe's Cos., the No. 2 U.S. home improvement chain, reported second-quarter profit surpassed Wall Street projections. The company said it will open 40 stores during the current quarter, and believes sales will rise 6 percent for the year.

Positive results and forecasts from retailers could give Wall Street a better idea about consumer spending. Results will also give a better idea about the health of the housing industry. Lowe's shares rose $1.57, or 5.8 percent, to $28.44.

Nasdaq Stock Market Inc. rose 66 cents, or 2.1 percent, to $32.41 after the U.S. stock market said it will unload its 31 percent stake in the London Stock Exchange. The largest electronic exchange is now in the midst of fending off a rival bid from the Dubai bourse to acquire Nordic exchange operator OMX.