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All three major indices dropped by more than 1% for the day, essentially giving back yesterday’s gain. The economic news this morning was more or less in line with expectation. Initial claims dropped for the third week and came at 348K. Continuing claims, however, still stayed above 2.75 million. Trade Balance was a little better than expected at -58.8 billion, which was helped by strong export due to a weak dollar.
The financial sector led the market down today. Before the market open, UBS reported a net loss of $11.3 billion for its latest quarter after a further write-down of $13.7 billion related to the mortgage-related investment. Since the company had already warned about the potential write-downs in late January, so the earning news was not really that surprising. What really shocked investors was the company also revealed during the conference call that it still had more than $27 billion position related to the US sub-prime mortgages at the end of reporting quarter. In other words, more write-downs should be expected in the next few quarters. Interestingly, the Fed Chairman Bernanke commented during his testimony today that he also expected further write-downs in major financial institutions related to sub-prime mortgages. It seems things will get worst before it can get better. Financials faced more pressure in the afternoon when the insurance units of FGIC were cut by six levels by Moody’s and lost its Aaa rating.
Move on to Bernanke’s testimony today. The Fed Chairman didn’t change much of his stance regarding the growth and inflation perspective from his previous speeches. However, he did mention that financing condition remained challenging for many businesses even after the Fed had cut interest rates by 225 bps since last September and the market took it as a hint that the Fed would continue to make aggressive interest rate cuts. The US dollar got weakened against major currencies while the CRB commodity index hit another all-time high. Since the Fed is currently expecting inflation to moderate by the second half of 2008 after economy slows down during the first half, Mr Bernanke will really be in a “conundrum” position if things turn out differently than he thought.
Happy Valentine\'s Day!
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