The global financial crisis has just entered a new and unsettling chapter. Major U.S. stock indexes were expected to open sharply lower Monday as index futures plunged in Globex trading ahead of the start of regular U.S. trading hours. Traders woke up Monday to consider a vastly changed Wall Street landscape: Distressed investment bank Bear Stearns (BSC) agreed to sell itself for $2 a share on Sunday to JPMorgan Chase (JPM).
The stock had closed Friday at $30.85. The deal valued the one-time Wall Street powerhouse at just $240 million -- just a fraction of its market capitalization of of about $3.5 billion at the close of trading Friday -- and its $20 billion valuation in January, 2007.
The ramifications of the deal were still being considered Monday morning. The Wall Street Journal reports many bankers are steeling themselves for the global financial crisis to both last longer and grow deeper, a shift in mood that could magnify the potential for upheaval in markets and economies world-wide.
Meanwhile, the Federal Reserve, a key player in facilitating the Bear-JPMorgan deal, took some steps over the weekend to ease the stress on financial markets -- its first weekend move in nearly 30 years. The U.S. central bank cut the discount rate on Sunday to 3.25% from 3.5%, and announced that it will lend to the 20 primary dealers that buy Treasury securities directly from it and provide up to $30 billion to JPMorgan Chase to help it finance the purchase of Bear Stearns.
The Fed is widely expected to cut its benchmark interest rate, the Fed funds rate target, by a full percentage point on Tuesday to 2.0%.
Stock markets in Asia and Europe also logged declines Monday. Meanwhile Treasury bond prices were soaring in overseas trading, while the dollar skidded to record lows. Gold soared to a new record high, while oil futures gained.
Also on Monday, President Bush was set to meet with economic advisers including Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson to discuss the deepening crisis.
The market looked ready to extend Friday’s losses. In a volatile session capped by a late burst of short-covering, the Dow Jones industrial average tumbled 194.65 points, or 1.60%, to end the session at 11,951.09. The broader S&P 500 index dropped 27.34 points, or 2.08%, to finish at 1,288.14. The tech-heavy Nasdaq composite index declined 51.12 points, or 2.26%, to close at 2,212.49.
The market was awaiting reports on the current account deficit, which economists expected to widen to $181.3 billion, or 5.2% of GDP, in the 2007 fourth quarter. Also, the Empire State index, a regional manufacturing gauge, was seen improving to -6.3 in March from -11.7 in February. A report on industrial production was expected to show a 0.1% decline in February, with capacity Utilization falling to 81.3%. The National Assn. of Home Builders' index was expected to post an unchanged reading of 20 in March.
The dollar index, which plunged to a record low 70.698 earlier, was off 0.42 to 71.19 early Monday amid speculation the Fed, European Central Bank, and the Bank of England might take some joint action to stabilize a market jolted by U.S. and global securities and banking problems. JPMorgan Chase's deal to buy stricken rival Bear Stearns for a rock-bottom price and the Fed's expanded lending to securities firms for the first time since the Great Depression has sent shock waves throughout the world. The news has slammed the U.S. dollar to a record low against the euro, pummeled Asia stock markets and boosted gold and low-risk bonds.
Traders will be regarding the action in securities firms such as Lehman Brosthers (LEH), Citigroup (C), Merrill Lynch (MER), and Goldman Sachs (GS). The big banks were among the industry names suffering losses Friday when news of Bear's parlous financial condition, and the JPMorgan rescue effort, first broke.
April NYMEX crude oil futures rose 66 cents per barrel to $110.87 early Monday, after ranging between $109.78 and $111.80 in after hours electronic trading. Oil slipped back after reaching a new record high of $111.80 during Asian trading on a weakening dollar. Traders cited by Action Economics are reporting that a flight away from U.S. assets is helping to support oil, as well as oil being used as an inflation hedge. Such factors are likely to support crude going forward.
April gold futures were up $24.90 to a record $1024.30 per ounce in a flight to safety from global banking crisis that had driven stocks sharply lower.
European stocks headed lower amid the dramatic news from the U.S. and rumors of an emergency ECB meeting this morning, though a Fed-style emergency rate cut seems unlikely at this point. In London, the FTSE 100 index fell 1.07% to 5,631.70. In Paris, the CAC 40 index declined 0.82% to 4,592.15. Germany's DAX index shed 0.75% to 6,451.90.
Asian markets fell as fears from the U.S. financial crisis rippled across the globe. Japan's Nikkei 225 index fell 1.54% to 12,241.60. In Hong Kong, the Hang Seng index declined 0.29% to 22,237.11.