With a massive rescue of the financial sector in limbo, Wall Street was hopeful about a lifeline but also fearful it might not materialise, analysts said. The market has been volatile amid intense debate in Washington over the government's proposed 700-billion-dollar package to buy up distressed real estate assets to help restore stability to the financial system.
The major Wall Street indexes lost ground in a choppy week of ups and down. The Dow Jones Industrial Average of 30 blue chips fell 2.15 percent on the week to 11,143.44 and the broad-market Standard & Poor's 500 index slid 3.33 percent to 1,213.27.
The technology-heavy Nasdaq composite tumbled 3.98 percent to 2,183.34.
Although the stock market has held in a trading range, analysts have been concerned about a freezing up of credit markets. With banks unwilling to lend to each other, or demanding high premiums for loans, the impact could be severe on the markets and economy. "Whatever the solution, something needs to be done - and soon," said David Kastner, a market analyst at Charles Schwab & Co. "Despite the relative buoyancy in stocks, the credit markets are in a state of turmoil," he added.
"Banks and companies alike are hoarding cash as the commercial paper market - which is the lifeblood of most major companies' daily operations - begins to seize. The longer this financial crisis persists, the more it pressures the real economy, which is already in a self-feeding negative cycle."
Adolfo Laurenti, senior economist at Mesirow Financial, said markets have been unsettled by a lack of a clear message and inconsistency on the part of US officials.
"We know the government will do something but we don't what, and that is confusing to the market," he said. If no action is taken, Laurenti said this will mean severe consequences, but the impact is unclear. In the worst case, he said companies may be unable to get access to short-term loans to meet their payrolls, triggering more turmoil.
"Chances are that Congress will cave in and play along with the Treasury, under the economic and political pressure that 'something must be done,'" he said. "For all the legitimate doubts that can be expressed on the plan, the fact is that the economic consequences of inaction would be severe."
Sherry Cooper, chief economist at BMO Capital Markets, said Wall Street has not been reassured by the Washington soap opera. "We are now in the midst of a vicious downward spiral leading to even more foreclosures and defaults on car loans and credit cards, and worsening labour market conditions," she said. "At the same time, the rhetoric from the president, the Treasury secretary and the Fed chairman is far from calming.
Fred Dickson, chief market strategist at DA Davidson & Co, said the situation on Wall Street remains highly unsettled and there could be "huge selling" if no agreement is reached. "We suspect investors will become increasingly nervous as time passes waiting for news on this front," he said.
"As this drama plays out, the credit markets are seizing up." Dickson said traders must wonder "if the rank and file members of Congress really understand the depth of the problems and the importance of getting a plan launched before the credit markets completely seize up and shut down, more major financial institutions fail, and normal bank lending dries up sending the economy into a deep recession."
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