US Markets Fall as Traders Fear Removal of Economic Stimuli

Posted on | October 30, 2009 |

The Dow and S&P 500 resumed their descent today, as investors feared that the premature removal of economic stimuli may stall growth and even lead to a double-dip recession.

These concerns were ignited by the Bank of Japan today, which said it will stop buying corporate debt at the end of this year. Australia may also follow suit after raising interest rates last month while Germany’s Axel Weber recently signalled that the ECB may start to withdraw stimulus measures next year.

The message couldn’t be any clearer – central banks are at a stage where they simply can’t afford to continue injecting money into their economies because the outcome of pumping additional stimulus may far outweigh the benefits of adding more.

While such a move is understandable in countries such as Australia, it may be too premature for other economies. This is, not surprisingly, creating some anxiety in the market, with certain renowned investors adding fuel to fire by saying that risks of a double dip recession are now on the rise.

In a speech delivered in Budapest today, billionaire investor George Soros warned that the global economic recovery is ‘liable to run out of steam’ and a ‘double dip’ may ensue in 2010 or 2011.

As a matter of fact, an official government report released by the US Commerce Department this afternoon indicated that American consumer spending stalled for the first time in four months in September, as the effect of the government stimulus programmes started to wane.

The report indicated that personal consumption expenditure declined 0.5% last month, with spending on durable goods sliding 7.2% in September after gaining 6.7% the prior month. Incomes, meanwhile, remained flat. The Reuters/Michigan Consumer Sentiment index was also lower, down to 70.6 this month from 73.5 in September.

On a positive note, the Chicago Purchasing Managers’ Index (PMI), a gauge of regional business activity, surged to a reading of 54.2 in October from 46.1 the month before, suggesting that economic activity in the region expanded this month. PMI readings above 50 are expansionary.

By 3.30pm (London time), the Dow Jones Industrial Average was 89.25 points (-0.90%) lower at 9873.33, while the broader S&P 500 was 10.73 points (-1.01%) below its previous close at 1055.38. The Nasdaq was also in the red, down 12.22 points (-0.71%) at 1699.05.

Crude oil and metal prices were also under pressure this afternoon, as risk aversion bolstered US Dollar demand.

Not surprisingly, shares in energy majors fell today, with Exxon Mobil down 2% to $76.4 and BP 2.3% lower at $56.96 a share after being slapped with a record $87 million penalty for workplace violations linked with the 2005 Texas City refinery blast.

Chevron was dragged down by negative sentiment this afternoon, falling 1.9% to $76.47, despite unveiling better-than-expected quarterly earnings. The energy company reported third-quarter net profit of $3.83 billion, or $1.92 per share.

Although 51% lower than last year’s comparative, it was substantially higher than Reuters’ expectations of $1.47. Third-quarter revenues were a disappointment, however, down 41% to $46.6 billion, slightly below expectations of $47 billion.

Banks were under some stress as well, with the likes of Citigroup, Bank of America, and JP Morgan down by more than 3% to $4.16, $15.09 and $42.87, respectively.

Elsewhere, software company McAfee was another casualty, down 6.8% to $40.82, after reporting revenues that missed estimate. Wireless broadband company Novatel Wireless tumbled a staggering 27% to $8.87 after warning that its sales of mobile wi-fi products may be lower.

Bucking the negative trend was casino company Las Vegas Sands, which jumped 3.2% to $15.23 after unveiling that its Las Vegas convention business is recovering.

Life insurer Genworth Financial was also in demand, up 3.3% to $10.53 after reporting its first profit in six quarters and beating consensus estimates.

By Anthony Grech, Research Analyst, IG Index.

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