Wall Street and its regulators girded yesterday for the reopening of U.S. stock markets as economic policymakers stepped up efforts to limit the fallout from Tuesday's terrorist attacks on the global economy and financial system.
Against the ominous backdrop of a plunge in European shares, the U.S. Securities and Exchange Commission confirmed yesterday that it will temporarily relax some rules in order to make it easier for market participants to prop up share prices on Monday, when U.S. stock markets are scheduled to resume trading after a four-day hiatus.
The SEC said it "has used, for the first time, its emergency powers to ease certain regulatory restrictions temporarily" on stock trading. Among other things, the SEC said, it would allow corporations to buy their own shares without regard to ordinary volume limitations.
The SEC announcement came as a grass-roots movement gathered momentum among U.S. investors, both big and small, aimed at demonstrating America's defiance after the attacks by preventing a stock market rout on Monday. The initiative, which included exhortations over the Internet to buy U.S. stocks, supplements an extraordinary and informal agreement among securities firms and corporations -- disclosed by Wall Street sources Thursday -- to buy shares if a flood of sell orders threatens to send the markets spiraling downward.
As a result, some analysts found reason to reconsider their initial thoughts about the probability of a disastrous market opening.
"The 'patriot rally' school is moving in on the 'sell everything' team," said Robert Stovall, market strategist at Prudential Securities, who added that while travel-related stocks, such as those of airlines and hotel companies, will suffer, other issues may benefit.
The declines in overseas markets, however, reflected mounting investor concern about the attacks' short- and long-term impact on the global economy. After two days of rebounding from a steep initial sell-off Tuesday, Germany's DAX index fell 6.29 percent yesterday, and the FT-SE 100 index of leading British shares closed down 3.8 percent. Market analysts cited fears that the Bush administration's threat to retaliate against terrorists could ignite a wider conflict, and they said investors were extremely reluctant to hold shares over the weekend.
The dollar tumbled to a six-month low against the euro and the Japanese yen on concern about the likelihood that the U.S. economic slowdown will turn into a full-fledged recession. Oil prices jumped to nearly $30 a barrel.
In Asia, indexes in Taiwan, India and South Korea fell more than 3 percent and Thailand's plummeted 6.51 percent. Brazilian shares, which have dropped sharply in recent days, fell another 2.6 percent.
Despite the worrisome foreign results, and severe logistical problems on Wall Street, including phone outages and damaged buildings, the exchanges pressed ahead with plans to resume trading Monday after the longest halt since the Great Depression.
The New York Stock Exchange and other exchanges plan to test their systems today to make sure they are ready to open, but NYSE Chairman Richard A. Grasso said, "I don't think there is any reservation that Monday at 9:30 . . . the bell will indeed ring here." New York City firefighters and police officers will be present, he said, and traders will observe two minutes of silence in honor of the victims of the disaster.
As exchange officials scrambled to ensure that the markets could function, many investors were moved to publicly declare their intention to avoid actions that might contribute to a market dive. Among those cheering the movement was Larry Kramer, a commentator on the "CBS MarketWatch" television program and Web site, who said on the site that his readers had inspired him to propose using the markets to "send a message" to the terrorists: "On Monday invest as much and as often as you can in America." He cited similar exhortations that had been posted in market chat rooms.
Wall Street sources said managers of hedge funds -- unregulated pools of cash owned by rich investors -- have been asked by those investors not to attempt to profit from a decline in share prices. Hedge funds often engage in short-selling, which involves betting on falling prices.
One short-seller, Pacific Equity, promised to eschew the practice until the market settles down. "I'm sure I could make a lot of money if the world panicked," Anthony Elgindy, the firm's principal, told the Dow Jones news service. "But I'm not convinced that's a business philosophy I want to employ."
Still, it is far from clear whether such sentiment will hold up if massive selling occurs. Andy Brooks, chief equity trader at T. Rowe Price, voiced doubts that professional investors will purposely lose money to show their patriotism. "I don't think that anyone would step in front of a moving freight train, if that indeed is what it turns out to be," he said.
The SEC's decision to ease certain trading rules was designed to ensure that there will be plenty of buyers Monday. The commission invoked powers Congress granted to it in 1990 in answer to the 1987 market crash. The rule changes the SEC announced yesterday apply for five days, although they could have been put in place for up to 10 days.
"These changes should ensure greater market liquidity without compromising investor protections against fraud and manipulation," said Annette Nazareth, the SEC's director of market regulation. "We'll have a fair market, an orderly market, but one with more liquidity."
The SEC said it will relax limits on how many shares a company can buy back and at what times. It will also be easier for executives, directors and other so-called insiders to buy shares of their own companies. In addition, the SEC will permit mutual funds to borrow from affiliates to meet their cash needs.
The market's regular rules restrict how much of its own stock a company can buy each day and when it can buy. Purchases at the beginning and end of the day, which could most strongly influence the price of the stock, are normally prohibited.
Among the companies that will presumably engage in share repurchases is Cisco Systems Inc., which announced a plan to buy back $3 billion of its stock when the markets open. Cisco's stock has skidded from $63 a share to $14.45 in the past year. The $3 billion buyback represents a little less than 3 percent of the company's stock.
The SEC did not impose any new restrictions on short-selling, despite concerns among some market participants that it would do so.
The Federal Reserve pumped $81.25 billion into the banking system yesterday, the third daily record amount in a row. The move is to ensure that commercial banks, investment banks and other firms don't come up short of cash just because the usual channels through which transactions are settled are not working smoothly.
In one indication of the problems afflicting financial activities as a result of the devastation in downtown Manhattan, Fedwire, the central bank's electronic funds transfer network, had to remain open until 4 a.m. Friday, roughly 10 hours later than usual, Fed officials said. In some cases, details of transactions were taken down by hand rather than on computer.
Many investors and analysts expect the Fed to cut interest rates again by lowering its target for the federal funds rate, the rate banks charge each other for overnight loans. Speculation mounted this week that the Fed would act before its next scheduled policymaking session, on Oct. 2. But since the problems facing financial markets are primarily operational, they would not be alleviated by an immediate reduction in the funds rate. That means that any rate cut is much more likely to come at the meeting and not before.
The Fed has already lowered its target rate seven times this year, and rates have fallen in recent days to levels not seen in several decades because of anticipated weakness in the economy. Yields on two-year Treasury notes declined to 2.87 percent yesterday.
That decline is one manifestation of the growing expectation among forecasters -- magnified since the terrorist attack -- that the United States is falling into a recession, probably a short and shallow one, with the unemployment rate headed up toward 6 percent.
Yesterday the Commerce Department said retail and food sales increased last month by 0.3 percent. Analysts said that normally would suggest that consumer spending this quarter would have been strong enough to more than offset weakness elsewhere in the economy. But many types of economic activity have stalled since the terrorist attacks, including airline travel, financial transactions, shopping, car sales and sporting events.
"We now anticipate a sharp contracting in September consumer activity and have lowered our forecast," said economist Joe Liro at Stone & McCarthy, a financial markets research firm. "We have shifted to a short and shallow recession scenario, which finds third-quarter gross domestic product declining at a 1 percent annual rate."
Staff writers Kathleen Day, Carol Vinzant, Christopher Stern and Anthony Faiola and special correspondent Akiko Kashiwagi contributed to this report.
