U.S. stock futures point to major decline on re-open
By Steve Goldstein, MarketWatch
Last update: 11:19 a.m. EST Jan. 21, 2008
LONDON (MarketWatch) -- If futures contracts traded on a day when U.S. stocks weren't even due to open are anything near accurate, then markets will be in for a major decline on Tuesday, with concerns about bond insurers and the health of financial institutions dragging markets lower.
March contracts on the Dow Jones Industrial Average traded 482 points lower to 11,624.
Futures contract don't move in complete lockstep to the underlying indexes, but by comparison, the Dow industrials fell 382 points on Sept. 20, 2001, just days after the terrorist attack on the Twin Towers, and by 387 points on Aug. 9, 2007, shortly after the recent credit crunch first emerged.
S&P 500 futures fell 55 points to 1,270.10 and the Nasdaq 100 futures lost 72.25 points to 1,777.25.
U.S. markets were closed Monday for the Martin Luther King holiday. Trading won't resume until Tuesday.
The futures declines are on the back of big drops in European and Asian stock markets.
From developing markets like Shanghai -- down over 5% -- to established ones in Paris -- down nearly 6% -- financial institutions around the world sold off. See Europe markets.
Strategists at Morgan Stanley told clients on Monday to stay in cash.
"Our themes continue to be: patience, earnings recession, U.S. recession spreading global, bear market regime, don't be lured into value stocks as most are likely to be value traps, much more monetary easing. We expect flat but volatile markets just as in the 1989-92 period -- a real whipsaw environment for the market," they said.
Much of the fear stems from worries about potential ratings cuts for bond insurers, such as Ambac Financial, AAA ratings are on thin ice.
Fitch Ratings on Friday downgraded Ambac to AA from AAA after the bond insurer abandoned its plan to sell $1 billion in equity.
When a bond insurer is downgraded, all the securities it has guaranteed are, in theory, downgraded as well -- putting some $1.4 trillion of municipal bond securities at risk and more than $600 billion of structured finance securities at risk.
The fears were lent some support when the head of France's central bank, Christian Noyer, said that French banks "clearly, like all banks, in the world still (are) in the process of marking down assets." See related story.
In Asia, markets feared an $8 billion write off from the Bank of China (HK:3988: news, chart, profile) , one of China's big four financial institutions. See Asia markets.
The rescue plan presented by President Bush last week in a bid to help the U.S. avoid recession also wasn't well-received by markets.
"Ambivalence over Bush's rescue plan for the U.S. economy was the trigger of this rout," said Martin Slaney, head of derivatives at GFT Global Markets.
The Japanese yen surged against rivals -- up about 2% against the euro and 1% against the U.S. dollar -- with investors trimming risk by buying back the low-yielding currency. See currencies.
WestLB of Germany added to concerns by saying it would lose about $1.5 billion this year and take a write-off of similar size.
"Market sentiment is really sour," said Gerhard Schwarz, a strategist at UniCredit Markets. "There's been more bad news from the financial sector on top of continued recession fears," he said, speaking of Monday's equity market action.