Slide extended as global financial contagion spreads
Small-cap stocks remained unsettled this morning, unable to embrace Friday’s rescue plan package as equity markets around the world seized up and credit pipelines remained clogged despite massive additional liquidity injections this morning by the Federal Reserve. At 9:50 a.m. ET, the Russell 2000 (NYSE:IWM) was down 19.38, or 3.13%, at 600.02, slipping to the lowest point on intraday charts since May 2005.
In Europe, extraordinary measures were taken over the weekend on the banking front, with France’s BNP Paribas buying assets of beleaguered Fortis, while in Germany a rescue deal for Hypo Real Estate was sweetened by another 15 billion euros of liquidity, adding to an earlier pledge of 35 billion euros.
Everyone has been talking about the Federal Reserve slicing the Fed funds rate, but that rate has already been trading well below the current 2% rate in the market. This morning, the Fed increased the size of its cash auctions and also offered banks interest accrual on reserves. Stock index futures did pull off the overnight lows heading into the open on the Fed injection news, but the inability to stabilize financial markets in the direct aftermath of the $850 billion financial bailout bill Friday reflects just how deep the crisis is running.
Looking at market action around the world, European shares were off nearly 5% into the U.S. stock market opening. Elsewhere, Russian stocks tumbled some 15%, prompting various exchange trading halts. Japan was down 4.9%, Hong Kong off nearly 5%, China down 5.1%, Taiwan down 4.1%, Australia off 3.3%, Singapore down 5.6%, South Korea off 4.2% and India down 5.7%.
Market research experts at Goldman Sachs slashed their economic forecast for growth and interest rates “substantially” in a report issued Friday afternoon. Goldman said “The recession that we have been forecasting now looks likely to be deeper and longer, taking the unemployment rate to 8% by late 2009 and pushing the Fed to cut interest rates to 1% or lower.” Goldman noted that real consumer spending is on course to post its first quarterly decline since 1991, that manufacturing activity is in a slump and that a rapid contraction in the labor market is underway — all at the same time that financial market distress has intensified.
Fears of a global economic slowdown took a toll overnight on crude oil prices, with crude futures sinking some $4 a barrel to eight-month lows. The move in crude was likely prodded by a strong U.S. dollar, which jumped some 1% against the euro. However, the dollar was off almost 2% against the yen, which shows that the euro/yen cross was the real mover and shaker in world currency trade right now.
Large-cap stocks in the spotlight today include Wachovia Corp. (NYSE:WB), Citigroup Inc. (NYSE:C) and Wells Fargo & Co. (NYSE:WFC) as the latter two firms battle for ownership of WB. ImClone Systems Inc. (Nasdaq:IMCL) was up 4% on the open on news that Eli Lilly and Co. (NYSE:LLY) would buy IMCL for $6.1 billion, or $70 a share. Alcoa Inc. (NYSE:AA) and Illinois Tool Works Inc. (NYSE:ITW) were off 2% and 4%, respectively following analyst downgrades. MetLife Inc. (NYSE:MET) was the beneficiary of a bullish article in Barron’s over the weekend and was up 2% shortly after the open.
Individual small caps on the slide this morning included PRG-Schultz International Inc. (Nasdaq:PRGX), which gapped lower and tumbled 33%. In the last month, PRGX shares have been sliced by about 50%. Double-Take Software Inc. (Nasdaq:DBTK) also gapped to the downside, and slipped some 20% on earnings news.
Although there are no economic reports of note today, there will be appearances by Federal Reserve officials on the speaking docket. Chicago Fed President Charles Evans will talk about the economic outlook and productivity trends in manufacturing at noon and Dallas Fed President Richard Fisher will give general remarks about the Federal Reserve and the regional economy at 1:30 p.m. ET.
The chart structure retains a powerful bearish bias after snapping through key support late last week at 650. That point had turned back the bears on several occasions in recent years, but this time around when the buyers weren’t there the market went into freefall mode. As we plumb three-year lows looking for support, it’s worth noting that the market can slip into support “vacuums” more easily where sudden downdrafts take place. Below 606 and 600, there is very little convincing support on long-term charts until we approach 577.
