After Fed's rescue, volatile days ahead
NEW YORK (Reuters) - The Federal Reserve came to the stock market's rescue on Friday but unless credit markets remain stable this week, the salvation may prove little more than a brief respite from its late summer sell-off.
"It restores confidence, but we're not out of the woods yet," said Bill Hoskins, managing director of fixed-income research at Mellon Capital Management, in San Franscisco.
In a surprise before the market's open on Friday, the Fed cut the discount rate on its loans to banks to 5.75 percent from 6.25 percent. The fed funds rate on interbank loans was left at 5.25 percent.
Hoskins said the Fed has created a safety net that makes it possible for banks to lend to credit-worthy borrowers. But he also said financial institutions remain leery about lending to one another after the blowup in subprime mortgages.
Subprime loans are the lowest tier of the mortgage market where borrowers received loans despite poor credit histories.
If investors are looking past faltering credit markets for cues on what to do next, the week offers only a few pieces of economic data and a very thin calendar of corporate earnings.
Stocks, which erased nearly all of a 300-point decline in the Dow industrials in the final hour of Thursday's trading, rocketed higher on Friday after the Fed's move.
But the rally on Friday was not enough to prevent the major indexes from finishing with losses for the week.
The Dow Jones industrial average .DJI ended the week down 1.2 percent, the Standard & Poor's 500 index .SPX fell 0.5 percent and the Nasdaq composite index .IXIC declined 1.6 percent.
For the year, though, all three U.S. stock indexes are still higher. The Dow is up 4.9 percent, the S&P is up almost 2 percent and the Nasdaq is up 3.7 percent. Friday's surge helped the S&P recover from the previous two days, when the broad index had given up all its gains for the year.
Investors will obviously start the new week hoping that Friday's rebound will hold.
STOCKS MAY KEEP CLIMBING
"I'm expecting some follow-through on the upside," said Ralph Acampora, chart analyst and director of research at Knight Capital Group in Jersey City, New Jersey.
Acampora noted that the decline reached the point of a 10 percent pullback from all-time highs in the major indexes, in technical parlance a "correction" that washes out excesses. Secondary indexes had an even steeper pullback.
"I'm not looking for it to be huge by any means, but I think we'll get a little more out of it," Acampora said of the continued rally that he expects. But he warned that the subprime problems have "tentacles" that extend very far. Continued...
