NEW YORK — Wall Street recovered from steep losses Wednesday amid hopes for an imminent interest rate cut, but stocks still closed down in response to Merrill Lynch & Co.'s credit-related losses and a sharp drop in existing-home sales.
The Dow Jones industrials fell in morning trading by as much as 200 points after the market got one of its most-feared scenarios: Not only is the housing implosion dampening corporate profits, it appears to be accelerating.
But the blue chip index reversed direction later in the day, briefly bobbing into positive territory as rumors circulated that the Federal Reserve - scheduled to meet next week - might be lowering the discount rate before then. The central bank has also been adding a substantial amount of liquidity to the financial system over the past three days.
"Once people hear about a rumor, they cover their shorts. Even though it's just a rumor that's out there," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. Short-covering is when traders undo bets that the market is going to fall. "There was a lot of bad news this morning. It's pretty clear Wall Street wants a rate cut and wants it soon."
Investors have been clamoring for a cut with fresh evidence that the housing slump and summer'scredit crisis continue to drag on the economy. Merrill Lynch said it wrote down $7.9 billion from its exposure to mortgage-related securities, while a new housing report showed existing-home sales plunged last month.
The Dow was off just 0.98, or 0.01 percent, at 13,675.25.
Broader stock indicators fell, but were also off earlier lows. The Standard & Poor's 500 index fell 3.71, or 0.24 percent, to 1,515.88, while the technologydominated Nasdaq compositeindex lost 24.50, or 0.88 percent, to 2,774.76.
The increasing possibility of a rate cut sent Treasury bond prices sharply higher during the session. The yield on the benchmark 10-year Treasury note, which moves inversely to the price, fell to 4.34 percent from 4.40 percent late Tuesday.
The dollar was mixed against other major currencies, while gold prices fell.
Oil resumed its climb after a surprise drop in inventories, witha barrel of light sweet crude up $1.83 at $87.10 on the New York Mercantile Exchange.
The Russell 2000 index of smaller companies fell 7.68, or 0.94 percent, to 810.85.
In Asian trading, Japan's Nikkei stock average fell 0.56 percent, while Hong Kong's Hang Seng index fell 0.15 percent. In European trading, Britain's FTSE 100 fell 0.49 percent, Germany's DAX index fell 0.18 percent, and France's CAC-40 fell 0.56 percent.
Business, Pages 30 on 10/25/2007