February 2, 2008

Wall Street stocks swing wildly

US stocks were volatile on Friday as traders weighed up the first fall in US employment in 4½ years against a possible rescue plan for troubled bond insurers.

Traders welcomed a return of dealmaking activity as Microsoft made a $44.6bn takeover approach for Yahoo and also cheered a pick-up in manufacturing activity.

The wild swings capped a good week for US equities which were on pace for their best weekly performance in almost five years, after the Federal Reserve again slashed interest rates to head off the prospect of a recession.

Financials and homebuilders enjoyed the best of this week's gains amid the prospect of cheaper financing, but energy and tech stocks were weak as corporate earnings disappointed.

At midday the S&P 500 Composite was up 0.4 per cent at 1,384.41, on pace for a gain of 4 per cent this week, the best since March 2003. However, the index fell6.1 per cent in January, its worst start to a year since 1990. The Nasdaq Composite put on 2.6 per cent to 2,387.48 this week while the Dow Jones Industrial Average added 3.8 per cent on the week to 12,660.28.

"It's probably a bear market rally but I'm not sensing we're going to go too much lower," Martin Schulz, director of international equities at Allegiant Asset Management, said.

In attempting to gauge whether indeed this week was simply a blip or marked a nadir for recent woes, traders weighed up a slew of economic data which projected contrasting outlooks for the US economy. The Labor Department's jobs report made miserable reading as US employers cut jobs for the first time since August 2003, posting an overall decline of 17,000 last month.

The fall was a big shock for economists who had predicted a gain of around 80,000 jobs. Of scant consolation was the unemployment rate, which fell slightly from 5 per cent to 4.9 per cent.

Analysts were particularly surprised by weak growth in the US service sector. Meanwhile manufacturers cut 28,000 jobs while construction jobs fell 27,000.

"The idea that we have got outright job destruction in January is quite alarming," Robert Jukes, global investment strategist at Collins Stewart, said. "But I'm not going to get too pessimistic about this one number. We might look back next month and see it is not as bad as it looks right now."

The jobs report provided support to the Federal Reserve's decision this week to slash interest rates by 50bp, bringing total rate cuts in the last two weeks to an unprecedented 125bp. An anaemic fourth quarter GDP reading was confirmation of the Fed's concern about downside risks to the US economy.

However, there were plenty of economic morsels for the bulls as well, which encouraged some investors to buy into weakness.

The ISM manufacturing index showed factory activity expanded, rising to 50.7 from 48.4, versus expectations of a decline to 47. The data followed a larger-than-expected increase in December durable goods orders.

"Because of the weakening dollar I think the manufacturing sector is going to be the silver lining for the US economy," Mr Schulz, said.

Perhaps the week's most significant market catalyst was the fate of bond insurers. Ambac Financial and MBIA, rose 12.6 per cent to $12.92 and $13.80 to $16.16 this week amid reports of nascent plans which may save the monolines from receiving damaging credit downgrades.

Added to the mix was a revival in the dealmaking rumour mill. Shares in Washington Mutual soared 30 per cent to $20.95 this week amid persistent speculation it might be acquired by JPMorgan, up 9.4 per cent at $47.65.

The mining sector was shaken by Chinalco and Alcoa's equity raid on Rio Tinto, which put into doubt its proposed $130bn takeover by BHP Billiton and tantalised investors with the potential for further consolidation in the sector. Alcoa gained 9 per cent this week to $33.41.

Microsoft's $44.6bn offer for Yahoo offered up the prospect of a potential mega-merger in Silicon Valley causing Yahoo's shares to surge 26 per cent to $27.64 this week. However, Microsoft fell 7.5 per cent to $30.48.

Microsoft hopes the deal will appeal to Yahoo's weary shareholders who were disappointed this week by a23 per cent decline in quarterly earnings and a cautious outlook for 2008.

Google also proved a disappointment to investors. The stock fell 9 per cent to $515.28.

Motorola gained 17.5 per cent to $12.61 this week after it said it was considering spinning off its mobile phone division.

No comments: