While you were sleeping: BusinessWire overnight wrap

Wednesday 20th August 2008

Concerns about inflation and renewed worries about the depth of the credit crisis led Wall Street lower on Tuesday, with the S&P 500 posting its biggest two-day drop since June.

US government reports showed that prices paid by American business increased in July at their fastest rate in 27 years, while home builders cut back on construction amid a continued glut of unsold homes.

That gloom was compounded by comments by Kenneth Rogoff, a former IMF chief economist, who forecast that a large US bank would fail in the next few months.

"The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'," he told a financial conference in Singapore, according to Reuters.

The S&P 500 lost 11.91, or 0.9%, to 1,266.69. The Dow Jones Industrial Average declined 130.84, or 1.1%, to 11,348.55. The Nasdaq Composite Index slipped 32.62, or 1.4%, to 2,384.36. More than three stocks dropped for each that rose on the New York Stock Exchange.

The economic and credit worries hit financial shares the hardest. American International Group, the largest insurer, retreated 5.9% and Lehman Brothers Holdings, the biggest mortgage-bond underwriter, sank 13%.

The US housing slump has triggered more than $US500 billion of credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos, the fifth-largest US securities firm, according to Bloomberg.

Rogoff said the US government should nationalise Fannie Mae and Freddie Mac, the nation's biggest mortgage-finance companies, which have lost more than 85% of market value in 2008.

Energy had the biggest gain among 10 S&P 500 industries, rising 2.8% as oil rallied. Exxon Mobil, the largest US energy company, gained $US1.42 to $US77.95. Chevron increased $US1.52 to $US84.71.

Crude oil for September delivery rose 1.5% to $US114.53 a barrel in New York as a weakening dollar prompted investors to purchase commodities as an inflation hedge.

Euro Rebounds

The euro climbed to a session high of $US1.4791, recovering from a six-month low of $US1.4631 earlier, according to Reuters data. It was last at $US1.4768, up 0.5%.

Traders attributed the euro's recovery to a report by a US think-tank suggesting that the European Central Bank might have to raise interest rates again if euro zone inflation pressures did not ease.

But analysts said the euro was unlikely to rise back beyond $US1.50, with the market viewing any rally as a selling opportunity.

Two-year note yields fell three basis points, or 0.03 percentage point, to 2.30%, the lowest since July 15, at 4:09pm in New York, according to BGCantor Market Data. The 2.75% security due in July 2010 increased 2/32, or 63 cents per $US1,000 face amount, to 100 27/32.

Yields on 10-year US Treasury notes rose 2 basis points to 3.83%, up from a five-week low of 3.79%. Yields on 30- year bonds advanced 2 basis points to 4.46%.

The New York Board of Trade's dollar index, which weights the dollar against a basket of six currencies, traded down 0.3% at 76.822, after earlier hitting a new high for the year at 77.413.

Gold futures for December delivery rose $US11.10, or 1.4%, to $US816.80 an ounce on the Comex division of the New York Mercantile Exchange. Silver futures for December delivery gained 0.3 cent to $US13.22 an ounce.

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