Russell survives credit worries
The Russell 2000 (NYSE: IWM) rose while the Dow slipped on a day of volatile trading due to global credit worries that prompted the U.S. Federal Reserve to get involved. The small-cap index added 3.91 points, or 0.50%, to 788.78. The Dow Jones Industrial Average (INDU) fell 31.14 points, or 0.23%, to 13,239.54.
For the entire week, the Russell 2000 index gained 33.37 points, or 4.42%. The Dow gained 54.63 points, or 0.44%.
Concerns of tighter liquidity spread globally overnight, forcing central banks in Europe and Asia to inject billions into the money markets to bring down interest rates and calm shaken investors.
In the United States, the Fed added reserves three times during the day, for a total of $38 billion. That brought the federal funds rate, the rate that banks charge each other for overnight loans, back down to 5.25%, after it had floated up to 6% earlier this morning.
Globally, more than $300 billion has been injected in the last 48 hours to boost liquidity.
The fire started on Thursday, August 9, when the contagion from the troubled U.S. subprime sector infected France, causing BNP Paribas, the country’s largest bank, to suspend withdrawals from three investment funds that had placed about one-third of their $2 billion plus assets in securities backed by subprime loans.
Markets have been rocked in recent months as problems initially associated with the subprime mortgage sector, which serves borrowers with poor credit histories, spilled over in to the broader mortgage market and the general financial industry.
Today Countrywide Financial Corp. (NYSE: CFC) became the latest in a long and increasingly high-profile list of casualties.
The Calabasas, Calif.-based home-mortgage lender, the largest in the country in terms of volume, told the U.S. Securities and Exchange Commission after Thursday’s close that disruptions in the mortgage market could affect its liquidity. The company said that it currently has enough funding but warned of possible problems in the future. Countrywide also said that late payments on both prime and “nonprime” loans as of June 30 have increased compared to a year earlier, while the rate of delinquencies for all loans is up to 5% from 3.9% a year earlier.
With all the negative news, the bears had no problem dominating trading in the morning.
But the Dow and the Russell 2000 started gaining ground as investors digested news of the Fed’s triple intervention, with the small-cap index breaking positive territory around 12 p.m. ET and the Dow briefly doing the same a half hour later.
The Dow fell and mostly bounced around in negative territory, but the Russell stayed close to the flat line before experiencing a small upward bump at the end.
Separately, the price of goods imported into the United States rose more-than-expected in July, the fifth straight month of increases.
The U.S. Labor Department reported that import prices rose 1.5% due to a weak U.S. dollar and the high costs of oil, above the forecast increase of 1.0%. Prices added 0.9% in June.
Import prices have increased 2.8% for the twelve months up to July, whereas June’s year-on-year rate was 2%.
Collectively, the statistics suggest that the United States can no longer rely on cheap foreign imports to offset domestic price pressures.
