Wall Street looks to the Federal Reserve meeting in the coming week for reassuring words about the economy as the market tries to shake off its latest turbulence and fears about a downturn. As skittishness grew about a mushrooming crisis in the US housing sector, the main indexes suffered hefty losses over the past week.
The Dow Jones Industrial Average lost 1.35 percent over the week to Friday to end at 12,110.41, handing back gains from the prior week. The broad-market Standard & Poor's 500 fell 1.13 percent to 1,386.95 and the tech-dominated Nasdaq composite dropped 0.62 percent to close the week at 2,372.66.
The markets were roiled by concerns about the increasingly precarious situation in the US housing market, with rising delinquencies, especially in the so-called "sub-prime" segment of the mortgage market.
This brought a sharp selloff, which reminded market participants that the carnage from the global equities rout last month ignited in Shanghai may not have run its course. According to the Mortgage Bankers Association, delinquencies on home loans reached a three-year high of 4.95 percent of all outstanding loans in late 2006 and 13.33 percent for so-called "sub-prime" loans to people with poor credit histories.
Some fear a scenario in which failures among sub-prime lenders ripple into the banking sector, leading to a credit squeeze and hurting consumer spending, the key driver of the US economy.
A question for markets is how the Fed responds to the housing woes. Some say the central bank's role is not to bail out those who made or took out speculative loans, but if the economic ripples become big enough the Fed may be forced to act, some say. "Everybody is interested to see if (the housing market) continues to deteriorate," said Hugh Johnson at Johnson Illington Advisors.
Although the Fed is expected to keep rates steady at its two-day meeting Tuesday and Wednesday, Johnson said the statement from the central bank would provide clues on how the Fed would respond to a wider crisis.
"The market would like to see some evidence that the Fed is going to respond sooner and decisively to these problems," he said. Others say it may be too optimistic to think the Fed will ease interest rates to come to the rescue of lenders and homeowners. And the central bank has to keep inflation in mind, especially after hotter-than-expected reports over the past week on consumer and wholesale prices.
"The market seems to have discounted a number of Fed rate cuts," said Joseph Balestrino at Federated Investors. It could disappoint Wall Street if the rate cuts fail to materialise, and as a result, Balestrino said he is advising clients to position "defensively."
From a technical standpoint, some analysts were encouraged that the market held at key levels including the Dow at 12,000 amid the last round of selling. "The market seems to show some signs of stabilisation, with less volatility, which is a good sign," said Art Hogan, analyst at Jefferies and Co.
Bonds were well bid over the past week as safe haven investments. The yield on the 10-year Treasury bond dropped to 4.545 percent from 4.589 percent a week earlier and the 30-year bond yield dipped to 4.695 percent against 4.723 percent. Bond yields and prices move in opposite directions.
In the coming week, the Fed meeting will be the key focus for the market, but trading may also be influenced by reports on housing starts and existing home sales.
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