US stock futures turn higher on rate cut

[October 08, 2008]  NEW YORK (AP) -- Wall Street turned around early Wednesday, with stock index futures rising in response to emergency interest rate cuts by the Federal Reserve and other central banks. There was still caution in the market, however, as futures gave back some of their early pop higher.

The stock market had been heading to another sharp drop, joining world markets that were plunging in response to spiraling worries about the global financial system, when the Fed announced it was cutting rates by a half-percentage point. The central bank noted that the market turmoil posed a further threat to an already shaky economy; it was joined in the rate cut by banks including the European Central Bank and the Bank of England.

Dow Jones industrial average futures rose 102, or 1.05 percent, to 9,640. Standard & Poor's 500 index futures added 21.60, or 2.812 percent, to 1,028.10, while Nasdaq 100 futures rose 2.41, or 2.41 percent, to 1,368.75.

But futures came off their highs and were fluctuating, a sign that while the markets are happy about the rate cut, investors realize that the stagnant credit markets and the economy remain extremely troubled and are likely to remain so for some time.

"With all of this occuring as a coordinated effort is showing that everybody out there is trying to fight this thing, and that should bring some confidence back to the market," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group. "But, the big question now is can the credit market open for business."

In Asia, the Nikkei 225 closed 9.38 percent lower and Hang Seng tumbled 8.17 percent hours before the rate cuts were announced; their declines showed the extent of the worldwide gloom. European indexes, which were down about 5 percent before the rate cut, pared their losses. In Britain, the FTSE-100 fell 0.65 percent, Germany's DAX dropped 2.15 percent, and France's CAC-40 gave up 1.87 percent.

Investors had been extremely anxious in recent days for a rate cut, and while the Fed had taken other steps this week to try to ease the stagnant credit markets, including buying commercial paper, the short-term debt used by companies, its moves weren't enough to stanch losses that have taken the Dow Jones industrials down 875 points in just two days this week.

It is very likely that stocks won't begin to recover for good until investors are certain the credit markets are functioning in a more normal fashion. But there are also severe economic problems including heavy job losses and high unemployment that will also need to show improvement.

Credit has all but dried up in the weeks after the failure of Lehman Brothers Holdings Inc. Banks have been reluctant to lend for fear they won't be paid back. That in turn has been stifling the economy, and led to the huge plunges on Wall Street in recent weeks.

Demand for short-term Treasurys remained high because of their safety after the rate cut; investors are willing to take extremely low returns just to have their money in a secure place. The yield on the three-month Treasury bill, which moves opposite its price, dropped to 0.72 percent from 0.81 percent late Tuesday.

Investors also were buying longer-term Treasury bonds, which don't draw as much demand as shorter-term debt in times of fear. The yield on the 10-year note fell to 3.46 percent from 3.51 percent late Tuesday.

The first third-quarter earnings reports are showing signs of strain on companies, and that is adding more uncertainty to the stock market. After the close Tuesday, Alcoa Inc. said it would conserve cash by suspending its stock buyback program and all non-critical capital projects. The aluminum company's earnings fell 52 percent.

[Associated Press; By JOE BEL BRUNO]

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