Wall St set for defensive start

Wall Street was set for a weak start on Monday, with Microsoft shares down after a European Union court ruling and investors on guard ahead of earnings from investment banks this week

Light trading activity is expected on Monday as investors await the outcome of the Federal Reserve’s policy meeting on Tuesday.

Less than an hour before the opening bell, S&P 500 futures were 8.3 points at 1,489.70. The contract had traded in a range of 1,486.20 and 1,497.80 early on Monday.

Ahead of this week’s Fed meeting, the S&P has now rebounded more than 5 per cent from its mid-August low point of 1,406.70 when credit concerns intensified. That leaves the benchmark slightly more than 4 per cent below its record close of 1,553 in mid-July.

Also in focus this week will be financials. Lehman Brothers kicks off the brokerage sector’s third quarter reporting season on Tuesday, followed by Morgan Stanley on Wednesday. Bear Stearns and Goldman Sachs release their quarterly earnings on Thursday. Investors will pore over the results to see how the recent weakness in mortgage and credit markets has affected the sector.

Nasdaq futures were down 8.5 points at 2,016.5 and futures for the Dow Jones Industrial Average were down 60 points at 13,491.

Microsoft, a member of the Dow, was down 1 per cent at $28.71 in pre-market trade after an EU court rejected the software giant’s appeal against a past ruling. A $613m fine, levied for Microsoft’s abuse of its dominant market position in Europe, was also upheld.

The yield on the policy-sensitive two-year Treasury note was up 3 basis points at 4.06 per cent. Money market rates had eased further on Monday, but still remain well above their normal levels.

Interest rate futures suggest at least a quarter-percentage point cut in the 5.25 per cent Fed funds rate. Odds of a further quarter percentage point are just above 50 per cent. This kind of uncertainty over whether the Fed will move beyond a 25 basis point ease suggests there will be clear winners and losers after the decision.

Ahead of this week’s meeting, stocks have rallied sharply off last month’s lows. The prospect of some kind of ease in policy is seen preventing financial market stress infecting the broad economy.

If the Fed fails to cut rates, we would expect to see a major sell-off in the markets,” said Ethan Harris, chief US economist at Lehman Brothers. He said the reaction to either a 25 basis point or 50 basis point ease could be ambiguous.”

A cut in the funds rate to 5.00 per cent could be viewed as a Fed that is calm and in command, or complacent,” said Mr Harris. A 50 basis point move could be viewed as either ‘getting ahead of the curve’ or ‘a sign of panic’ and ‘a sign of skeletons in the closet.’”

Stocks experienced a choppy trading last week, but the important benchmarks experienced one of their better weeks since the squeeze in the credit and money markets emerged in mid-July.

The S&P 500 index rose 2.1 per cent last week to close at 1,484.25. The Nasdaq Composite gained 1.4 per cent to close at 2,602.18 over the week.

The Dow Jones Industrial Average rallied 2.5 per cent to 13,442.52, and it was the Dow’s best week since a rise of 2.8 per cent for the week ending April 20.


Wall St set for defensive start

Financial Times
9/17/2007 6:09:23 AM