Rate cut euphoria offset by recession fears

Kevin Pendley | Oct 08, 2008 10:04am EDT | Comment

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Small-cap stocks opened lower, but clawed back to a mild gain about 20 minutes after the open as fear about a recession and tight credit conditions battled overnight euphoria tied to global central bank rate cuts. This marked the first globally coordinated rate cut by central bankers since the 2001 recession in the aftermath of the 9/11 terrorist attacks. At 10:01 a.m. ET, the Russell 2000 (NYSE:IWM) was up 3.53, or 0.63%, at 562.48.

Volatility in the two-hour time frame ahead of the actual market opening has been unprecedented this week. Today saw S&P e-mini futures trade in an astonishing 92-handle range overnight as the market rallied on the rate cut news, then slumped as traders digested the news and decided it wouldn’t necessarily avert recession or unclog credit lines. Unless you were awake early this morning well before the opening, then you never even got to rejoice in a brilliant overnight rally in stock market derivatives.

The market was in retreat mode overnight in the wake of Tuesday’s slide to fresh four-year lows, but when the announcement came out at 7:00 a.m. ET that central bankers around the world were slashing interest rates in concert, it sparked a big relief bounce in equities. European shares went from a stunning 6% loss to a brief positive print, bolstered by not just the coordinated global rate cuts, but also by news that the Bank of England was injecting 50 billion pounds to help the banking business. The news on rate cuts came a little late to rescue Asian stocks, with Japan down 9.3%, Hong Kong off 8.7%, China down 3.7%, Taiwan down 5.7%, Australia off 5%, Singapore down 6.6%, South Korea down 5.2% and India down 3.1%. Trade on Russian and Indonesian shares was halted when they reached 10% declines.

For the record, the Federal Reserve slashed its target rate on Fed funds to 1.5% from 2%, the lowest level since August 2004. Meanwhile, the European Central Bank, Bank of England, Swiss central bank, Swedish central bank and even the Chinese central bank also sliced rates this morning.

Perhaps one early sign that the rate cuts weren’t going to gain immediate traction in the market was that gold prices pushed higher despite the news. Gold is seen as a safe-haven and if that market continues to grind higher, its unlikely money is flowing into equities. Also, crude oil prices pushed lower this morning, showing doubt that the economy is turning the corner yet. Along that same line of safe-haven thought, Treasury markets have turned overnight losses into a sizable morning rally, sending yields on bonds down about 2%.

Broad market sectors on the decline early this morning were paced by aluminum, life health insurers, office electronics, agriculture products, industrial REITS, oil refiners and tire and rubber stocks. On the upside, fertilizer, gold, photo products and casinos were all attracting buyers.

Lost in the shuffle of rate cut news this morning were the early results on monthly same-store retail sales. Wal-Mart Stores Inc. (NYSE:WMT) missed the projection and was down about 3% early on. Target Corporation (NYSE:TGT) sales also disappointed and the stock was off about 5% after the open. Small-capper Cache Inc. (Nasdaq:CACH) sales were off 6% and the stock was down nearly 4% early today.

Individual small caps of note this morning included Stewart Enterprises Inc. (Nasdaq:STEI), which gapped lower and shed some 29% after a buyout bid was withdrawn. This theme has popped up several times in recent days on big downdrafts for individual small-cap stocks, and is a reflection of the tight credit condition in the marketplace and also the loss in market cap value for companies on both sides of the exchange. NETGEAR Inc. (Nasdaq:NTGR) was down 18% as the company pre-announced earnings that were soft. PeopleSupport Inc. (Nasdaq:PSPT) rallied some 20%, recapturing a big chunk of Tuesday’s huge decline.

The chart picture remains bleak after the market rejected a rally Tuesday morning to forge fresh multi-year lows. There is support near 544 from a low back in August 2004, then down at 535 and 516. On the upside, resistance comes in today at 554, 560 and 571.