Tags: Markets | Plunge | Despite | Fed | Rate | Cut

Markets Plunge Despite Fed Rate Cut

Monday, 17 September 2001 12:00 AM

Even with intervention by the Federal Reserve, which cut the key Fed Fund's rate by 50 basis points to 3.0 percent, it could not give the markets the traction they needed. Monday's rate reduction was the eighth cut since Jan. 1.

The market's four-day closure was the result of damage from the two commercial airliners that plowed into the World Trade Center's twin towers, collapsing them, and crippling all of lower Manhattan. The NYSE was without power or telecommunications until the weekend. The Nasdaq, the world's largest electronic exchange, with most of its infrastructure outside New York, nevertheless also had some system problems that required testing.

An estimated 5,000 people were either killed or missing and feared dead in the New York attack.

The closure of the markets was the longest since the Great Depression. The blue-chip Dow Jones industrial average Monday dropped 684.33, or 7.12 percent, to close at 8,921,18. This was the largest one-day point drop on record, though in percentage it was much less than the 20 percent drop on Oct. 19, 1987.

The tech-heavy Nasdaq composite index was down 115.58 points, or 6.82 percent, to close at 1,579.71. The broader New York Stock Exchange composite index was down 26.09 points to close at 541.99. The Standard & Poor's 500 index was down 53.76 points to close at 1,038.78.

The American Stock Exchange composite index (which is heavily weighted in the oil sector) lost only 2.47 points to close at 852.88. The Wilshire Smallcap Index was down 37.31 points to close at 638.80.

The broad Wilshire 5000 dropped 513.68 points, to close at 9,590.

Investors saw record heavy trading volume and volatility throughout the day. Traders said any possible stock market rallies over the next several were likely to be a short-term "emotional" increases that the market would reassess after the U.S. military response to last week's attack is clear.

NYSE volume was 2.63 billion shares, exceeding, by 20 percent, its previous record of 2.13 billion shares, set on Jan. 4 of this year. Volume on the Nasdaq was 2.21 billion shares.

Market breadth was sharply negative, with decliners beating advancers by 5 to 1 on the NYSE and by 4 to 1 on the Nasdaq.

Wall Street traders and analysts endured a steep drop right after the starting bell, which was sounded after two minutes of silence.

Before the markets opened the Federal Reserve, acting between its regularly scheduled meetings, slashed short-term rates by a half percentage point to 3 percent from 3.50 percent to prop up the struggling U.S. economy.

"Even before the tragic events of last week, employment, production, and business spending remained weak, and last week's events have the potential to damp spending further," the Federal Open Market Committee said in a statement.

"For the foreseeable future, the Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth, and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness," the FOMC said.

The FOMC met in a 25-minute conference call at about 7:30 a.m. EDT, the Federal Reserve said. The meeting began with a moment of silence.

In addition to its interest-rate action, the Fed said it would continue to supply the U.S. financial system with as much liquidity as needed.

"The Federal Reserve will continue to supply unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored. As a consequence, the FOMC recognizes that the actual federal-funds rate may be below its target on occasion in these unusual circumstances," the FOMC said.

The Board of Governors voted unanimously to approve a similar cut in the discount rate, lowering that rate by 50 basis points to 2.5 percent.

In taking the discount-rate action, the FOMC approved requests by the Federal Reserve Banks of Richmond, Chicago, Minneapolis, Dallas and San Francisco.

Banks have rushed to the Fed's discount window since Tuesday's terrorist attacks.

The Fed said Thursday that it had almost $46 billion in outstanding discount loans at the close of business Wednesday, a level that has usually been under $200 million this year.

The discount window provides emergency loans to banks and is one of the Fed's most powerful ways of preventing crippling runs on banks if customers begin to draw down deposits en masse.

The Fed has also injected huge quantities of money into the financial system via overnight repurchase agreements, and it has set up extended lines of credit with other central banks to keep the international financial system running.

Even as the FOMC made clear its concerns about economic weakness, the committee expressed optimism about the U.S. economy's long-term prospects.

"The long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate," the FOMC said.

Analysts noted this week's economic figures would take a back seat, with the consensus view that the economy is, or soon will be, in a recession.

The August Consumer Price Index will be released Tuesday, followed by the Fed's Beige Book and July trade numbers later in the week.

Meanwhile, the focus of the domestic market remained on some of the sector patterns.

Analysts said airlines and leisure industries came under heavy selling pressure as well as insurers.

Defense contractors and infrastructure plays number among the notable standouts.

All told, Wall Street is faced a drama-filled, historic session, one that had its share of pathos as the community reflected on its members who are missing, while mustering its resources for the task at hand - the not insignificant symbol of a nation in recovery.

Meanwhile, Goldman Sachs chief investment strategist Abby Joseph Cohen cut her 12-month projection for the S&P 500 index to a range of 1,250 to 1,400 points from 1,550. A long-term bull on the U.S. equities market, she continued to assert that equities are attractively priced even with adjustments following the tragic events of Sept. 11.

Cohen said that the U.S. economy faces temporary stresses, but is fundamentally sound. Also, she added, the banking system has functioned well through the crisis.

The bond market declined with the 30-year government note losing 18/32 to yield 5.39 percent, while the 10-year Treasury note dropped 11/32 to yield 4.59 percent.

In Europe, stock prices ended higher in London, Paris and Frankfurt in active trading. The London International Stock Exchange's blue-chip FTSE-100 index gained 100.8 points, or 2.12 percent, to 4,856.5. The German Xetra DAX index rose 118.57 points, to close at 4,2234.55 and the French CAC-40 index rose 105.97 points to close at 4,015.46.

Analysts said European markets rallied after the Federal Reserve Board cut interest rates for the eighth time this year in a surprise move.

Stocks were also boosted after the European Central Bank lowered its benchmark lending rate 50 basis points to 3.75 percent, following a half-point reduction by the Fed.

Earlier in Asia, prices on the Tokyo Stock Exchange plunged to their lowest level in almost 18 years as market players repositioned themselves for the resumption later in the global day of U.S. stock trading.

Japan's blue-chip Nikkei Average of 225 selective issues dropped 504.48 points, or 5.0 percent, to 9,504.41 - its lowest close since Dec. 19, 1983.

Analysts said stocks fell as local market players expected the U.S. stock market to initially nose-dive in reaction to the terrorist attacks, which are expected to accelerate the economic slowdown by harming consumption and production.

Meanwhile, Tokyo-listed shares of U.S.-based stocks did not trade for the fourth day as exchange officials suspended the issues until Wednesday to allow for New York markets to trade first.

Elsewhere in Asia, stocks also fell sharply on the Hong Kong Stock Exchange amid concerns over the opening on Wall Street. The blue-chip Hang Seng Index sank 336.10 points, or 3.48 percent, to 9,319.35, after falling as much as 403.74 points earlier in the session.

Prices also ended lower on the South Korean Stock Exchange. The Kospi composite index fell 13.53 points, or 2.81 percent, to 468.76.

The South Korean government held an emergency meeting early Monday and decided to inject 4.6 trillion won ($3.7 billion) into investment trust companies in September to boost the financial markets. The news, however, failed to immediately cheer up market sentiment.

Elsewhere around the region, stocks fell on the Australian Stock Exchange. The blue-chip All Ordinaries Index sank 145.40 points, or 4.78 percent, to 2,895.40.

Meanwhile, Taiwan's financial markets were closed as Typhoon Nari neared the island.

Pakistan closed all three of its stock exchanges - Karachi, Lahore and Islamabad - from Monday to Wednesday. Pakistan is facing the mounting U.S. pressure to open its airspace for launching an offensive against Afghanistan and hunting down Osama bin Laden.

Copyright 2001 by United Press International.

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Even with intervention by the Federal Reserve, which cut the key Fed Fund's rate by 50 basis points to 3.0 percent, it could not give the markets the traction they needed. Monday's rate reduction was the eighth cut since Jan. 1. The market's four-day closure was the result...
Markets,Plunge,Despite,Fed,Rate,Cut
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2001-00-17
Monday, 17 September 2001 12:00 AM
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