Dow Jumps Nearly 900 Points Despite Report of Low Consumer Confidence
A rebound in Asian markets during the night helped boost U.S. and European markets to sharply higher levels Tuesday morning, though the trend was briefly reversed on Wall Street after the release of a report showing that consumer confidence plunged to its lowest level on record.
But in the afternoon investors rushed to pick up beaten down shares, and the cheapest valuations in more than two decades lured investors back into equities. The Federal Reserve is also expected to cut interest rates on Wednesday.
“We’re in the camp that believes a bottoming process is in place,” Leo Grohowski, chief investment officer for the wealth management unit of Bank of New York Mellon, told Bloomberg News.
“Unless we really thought the banks were going under, there’s an awful lot of bad news that is already priced into the shares.”
The Dow jumped 889.35 points, or 10.9 percent, to 9,065.12, based on preliminary results. The Standard & Poor’s 500 index gained 91.58 points, or 10.8 percent, and the tech-laden Nasdaq composite rose 143.57 points, or 9.5 percent.
The U.S markets followed the trend of Japan’s Nikkei index, which recovered from a 26-year low and surged 6.4 percent as investors picked up devalued stocks of companies like Honda and HSBC.
The Conference Board said the consumer confidence index fell to 38, down from a revised 61.4 in September and significantly below analysts’ expectations of 52. That’s the lowest level for the index since the Conference Board began tracking consumer sentiment in 1967, and the third-steepest drop. A year ago, the index stood at 95.2.
“Consumers are extremely pessimistic,” said Lynn Franco, director of the Conference Board’s Consumer Research Center. “This news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season.”
Separately, a closely watched index of home prices fell by its steepest ever annual rate in August.
The Standard & Poor’s/Case-Shiller 20-city housing index dropped a record 16.6 percent from August last year, the largest drop since its inception in 2000.
The 23.4-point drop in the consumer confidence index from September to October is the steepest since it fell 36.9 points from October 1973 to December 1973, when the economy was in the throes of a severe recession. Then, the index was measured every two months. The index dropped 24.3 points from December 1969 to February 1970, Franco said.
Consumer sentiment is closely watched because consumer spending powers about 70 percent of economic activity.
In Tuesday trading in Europe, Volkswagen shares enjoyed a 60 percent rise after a nearly 150 percent jump on Monday, helping Germany’s DAX to a 7.9 percent gain.
By market value, Volkswagen became the world’s biggest company, worth more than $370 billion compared to Exxon Mobil’s $343 billion in market value.
Volkswagen’s gains came after news Sunday that Porsche increased its stake in the company to 42.6 percent, with the end goal of owning a majority stake.
Porsche’s announcement has forced short-sellers to cover their bets on a decline in the stock. Volkswagen is the most shorted stock in the DAX. Germany’s financial regulator is looking into the trading of the shares, but has not started a formal probe.
“If ever there was an example of market manipulation, this is it. Porsche’s stake-building process is at best obscure,” Piers Hillier, head of European equities at WestLB Mellon Asset Management U.K. Ltd. in London told Bloomberg News.
The FTSE 100 index of leading British shares was up 4.0 percent, while the CAC-40 index of leading French shares was up 2.6 percent.
The rebound comes after Monday’s plunge in markets on news of the Japanese Nikkei index tanking because of the high value of the yen, which would increase the price of exports.
Traders are on the lookout for possible moves by Japanese authorities to intervene and limit the strength of the yen, especially after the G7 release a statement on Sunday warning about the volatility the yen brought to the market and hinting that steps would be taken to stop it.
“Consistent intervention by the Reserve Bank of Australia over the last two days has raised the prospect of actual intervention by other central banks, namely the Bank of Japan following warnings about the sharp moves in the yen,” Hans Redeker, global head of FX strategy at BNP Paribas told the Associated Press.
The U.S. Fed is expected to cut the fed funds interest rate by half a percentage point to 1 percent. That would bring the rate down to where it was in late June 2003, which was its lowest point in almost 40 years. The rate is the interest that banks charge each other for overnight loans.
On Thursday, the Federal Reserve is also due to release its advance report on third-quarter real gross domestic product — the first such reading since the revised reading for the fourth quarter of 2007.