Business | Markets
Wall Street edgy over bailout plan
US stocks are unlikely to make much headway this week unless Congress comes up with a deal on the proposed package to rescue the beleaguered US financial sector and contain fallout from the global credit crisis.
- Reuters
- Published: 23:40 September 27, 2008
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New York: US stocks are unlikely to make much headway this week unless Congress comes up with a deal on the proposed package to rescue the beleaguered US financial sector and contain fallout from the global credit crisis.
With government data continuing to show that the US economy is deteriorating further, a deal on the $700 billion rescue plan to rid banks of bad mortgage debt might calm jittery investors as they close the books on September.
Although there is hope that Washington could reach a deal on the bailout before the weekend is over, political wrangling has investors nervous that the plan might be watered down or be hit by new roadblocks.
"The negotiations over the bailout are sapping the enthusiasm that people could have for the market," said Rick Meckler, president of investment firm LibertyView Capital Management in New York. "I think with no agreement, it's going to be hard for the market to push ahead."
Additionally, investors have to brace for a deluge of economic reports set for release this week, including the all-important non-farm payrolls report due on Friday.
Before the jobs report, investors will wrestle with a report on personal income and spending on Monday, which features a key inflation gauge favoured by the US Federal Reserve.
The S&P/Case-Shiller Home Price Index for July is due on Tuesday, along with a September gauge of manufacturing activity in the US Midwest and a reading on consumer confidence. A reading on the vast US services sector is due on Friday.
Economic data "has been on the backburner" for a while, but at some point, investors will have to renew their focus on the numbers coming out, very few of which are encouraging, said Bucky Hellwig, senior vice-president at Morgan Asset Management, in Birmingham, Alabama.
"If we continue to see weakness in employment - and there's no reason to assume we won't - that will create concern with regard to the consumer. It reinforces the idea that we're in a downward spiral."
Economists polled by Reuters expect that US non-farm payrolls lost 100,000 jobs in September, after August's decline of 84,000. The US unemployment rate is expected to hold steady at 6.1 per cent in September.
The toll of the credit crisis has shaken Wall Street to the core in the past three weeks, making September a month that will likely be remembered for a long time.
The US financial landscape has been ripped up by the bankruptcy of Lehman Brothers Holdings, a 158-year-old trading company and the parent of what had been the fourth-largest US investment bank; the government's takeover of American International Group, once the world's largest insurer, based on market value; the shotgun wedding of Merrill Lynch, the largest US retail brokerage, to Bank of America; the conversion of Goldman Sachs Group and Morgan Stanley to bank holding companies from investment banks, and the collapse of the nation's biggest thrift, Washington Mutual, which ranks now as the biggest bank failure in US history.
Lonely Street
With Goldman's and Morgan Stanley's abandonment of the investment banking model, Wall Street is beginning to look a lot like 'Lonely Street' - there aren't any of the storied "bulge bracket" investment banks left as stand-alone firms.
In another extraordinary effort to calm the markets, US securities regulators joined regulators from other countries in temporarily banning short sales of financial shares.
The US ban is set to expire on Thursday, October 2, but it might be extended if the authorities deem it's prudent to do so.
Both the Dow and the S&P 500 ended higher on Friday on hopes that the bailout plan will be approved. But the Nasdaq Composite Index finished slightly lower, following a disappointing outlook from BlackBerry maker Research in Motion.
But for the week, all three US stock indexes fell: The blue-chip Dow Jones industrial average dropped 2.15 per cent, while the Standard & Poor's 500 Index shed 3.33 per cent, and the Nasdaq dropped 3.98 per cent.
After Friday's closing bell, the Wall Street Journal, citing a person familiar with the situation, reported that Wachovia has entered into preliminary talks with a handful of potential suitors, including Citigroup. "The outlook for the markets is predicated on at least progress or an idea of whatever the bailout plan is going to be. The markets are looking for action," said Giri Cherukuri, head trader at OakBrook Investments in Lisle, Illinois.
"When the deal comes through, the market's reaction will be more based on what the details are. Is it favourable or not? And how much extra regulation is embedded in the deal?"
"Everybody knows how bad the financial sector is - but the question is, 'Is it moving to the rest of the sectors and how bad does it look for the rest of the world?'" said Linda Duessel, market strategist at Federated Investors in Pittsburgh.
"We'll be monitoring whether credit markets will even move in the direction of normal."
For the year to date, the Dow is down 15.99 per cent, while the S&P 500 is down 17.37 per cent, and the Nasdaq is down 17.68 per cent.
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