Wall Street rallied at the start of trading today as rapid deceleration in the number of US job cuts surprised even optimists.
Wall Street fell on speculation that the Federal Reserve may have to raise interest rates this year.
There haven’t been any major macroeconomic releases influencing sentiment today, but rather investors fretting over rising treasury yields, which is increasing the cost of borrowing in the mortgage market.
In order to bring down yields, however, the Fed may have no other option but to increase the size of its asset purchase programme; but in doing so, this would heighten inflationary risks and the need to raise interest rates.
‘The Fed is stuck in a very difficult place,’ said Mark MacQueen of Sage Advisory Services Ltd. ‘You can’t have it both ways. You can’t say I’m going to stimulate my way out of this problem with trillions of dollars in borrowing and keep rates low by buying through the other. I don’t think that is perceived by anyone as sound policy.’ [1]
Both the rise in bond yields and speculation of a rate hike have been having an impact on share prices as well. ‘Bond yields have been on the rise, and that spells weaker than average performance,’ wrote analysts at Bank of America-Merrill Lynch. ‘We found that stocks deliver below average performance when interest rates rise dramatically.’ [2]
Negative sentiment was exacerbated by fast food restaurant chain McDonald’s, which warned that current volatility may cut its earnings for the year by 20 cents a share. Shares in McDonalds fell 1.9% to $58.74, while Burger King Holdings declined 1% to $16.67 following its rival’s announcement.
Also weighing on the market were natural resource shares, which fell on the back of falling metal prices. Freeport McMoRan dropped 2.9% to $55.51, while Newmont Mining slid 2.14% to $43.88 a share this afternoon.
Airline shares were also under pressure today after the International Air Transport Association (IATA) said that the airline industry faces £9 billion worth of losses this year, almost double the estimates made three month ago, as rising fuel prices and weak demand take their toll on the industry. Shares in US Airways fell 5.5% to 2.75, while UAL Corp and Continental Airlines plunged more than 6.5% to $4.72 and $9.91 respectively.
In contrast, US banking shares traded higher this afternoon, as the market waited to see which banks were allowed to repay the government’s Troubled Asset Relief Programme (TARP) money. Shares in Citigroup were up by 3.2% to $3.57, and Bank of America was trading 1% higher at $11.99. Wells Fargo gained 2.6% to $25.36, while Bank of New York Mellon, which is said to be competing against BlackRock to buy Barclays Global Investors, traded 0.64% above its previous close at $28.4.
Elsewhere, US President Barack Obama today announced the creation of ten projects aimed at creating or saving more than 600,000 jobs. ‘We have a long way to go on our road to recovery but we are going the right way,’ Obama said in a statement. ‘Our measure of progress is the progress the American people see in their own lives. And until that progress is steady and solid; we’re going to keep moving forward.’ [3]
By 3.40pm (London time), the S&P 500 was down by 6.9 points (-0.73%) to 933.199, while the Dow Jones had slid 79.5 points (-0.91%) to 8683.63.
[1] Source: Bloomberg News (8 June 2009)
[2] Source: Bloomberg News (8 June 2009)
[3] Source: Bloomberg News (8 June 2009)
By Anthony Grech, Research Analyst, IG Index.
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