Why Traders Want Rate Cuts

The Reserve Bank of Australia cut interest rates 100 bps; their market is up a little more than 1 percent.

That's just the beginning: it's widely believed that the Bank of England will cut rates on Thursday, and the ECB almost certainly will soon. The markets sold off this morning when no rate cut announcement was forthcoming from the Fed.

Despite a belief that lowering rates may not do much, most traders disagree. Cutting rates is an attempt at reflation, and at this point that has become a major concern. Paying interest on reserves--which the Fed is now doing--is also a form of lowering rates.

Traders are also looking for more help to get the commercial paper market on a firmer footing (talk on our air about a Special Purpose Vehicle set up by the government to possibly purchase commercial paper) and, down the road, the establishment of some kind of exchange for credit default swaps.


1) Bank of Americadown 8 percent as they pre-announced earnings well below expectations, and cut the dividend in half, and announced they were raising $10 billion in new capital. This is the first time since 1978 that B of A has not increased their dividend.

2) AMD up 25 percent as they are planning to spin off their manufacturing operations to a joint venture (to be called Foundry Company) with entities associated with the government of Abu Dhabi. AMD will own 44.4 percent of the venture's common, stock, while Abu Dhabi's Advanced Technology Investment Company will own the remaining 55.6 percent.

3) Alcoa is facing its earnings report after the close today in a no-win situation.

Recall that the company was under pressure for months because aluminum manufacturers are extremely energy intensive, and the stock was under pressure as energy prices began topping out.

Now, analysts have been reducing their forecasts for global aluminum prices as the global slowdown trade takes hold. Example: UBSjust reduced estimates for aluminum prices for 2008 (by 36 percent), 2009 (by 70 percent!), and 2010 (by 74 percent!).

Alcoa is at a 10-year low.

4) Corning reaffirmed earnings but lowered the full year of LCD growth view.

UPDATE: How difficult is it to play this market? Try this: In the space of less than nine hours overnight and into this morning, S&P futures prior to the open went from (roughly) 1050 to 1070, then back to 1050 as Europe opened down, then back up to 1070 (on hopes of a rate cut announcement), then back down to 1050 (when no rate cut came), then back up to 1070 (after the Fed announced a facility to buy commercial paper).

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