‘Merger Monday’ fails to excite Wall Street

US stocks on Monday extended last week’s losses amid renewed concerns about inflation and as the Federal Reserve prepared to hold a $20bn term loan auction to help ease the credit squeeze. Bonds rose and the dollar also traded higher.

Less than an hour after the opening bell, the S&P 500 was down 0.6 per cent at 1459.55 while the Dow Jones Industrial Average fell 0.5 per cent to 13, 272.95 and the Nasdaq Composite declined 0.5 per cent to 2623.28.

Investors will this week keep a keen eye on the major US investment banks amid fears of further write-downs in the troubled financial sector. The S&P investment bank index was trading 0.6 per cent lower in early trade.

Goldman Sachs, down 0.2 per cent at $210.19, reports quarterly figures on Tuesday, while Morgan Stanley, down 0.8 per cent at $49.88, releases its fourth quarter earnings on Wednesday with Bear Stearns, 0.6 per cent weaker at $94.70, set to follow suit the following day.

Lehman Brothers, 1 per cent lower at $61.65, reported last week and although its earnings fell, it was widely considered to have avoided the severe credit-market losses expected to afflict some of its competitors.

Citigroup on Monday downgraded a range of financial companies, including Countrywide Financial, the mortgage lender and MGIC Investment, the mortgage insurer. Countrywide fell 1 per cent to $9.70 while MGIC shed 1 per cent to $22.83.

”We expect consumer lenders/insurers to face further credit challenges as home prices decline 3% to 5% in each of the next two years, mortgage rates reset and the macro economy slows,” Bradley Ball, a Citi analyst, said.

But Ambac Financial, the bond insurer, rebounded 19 per cent to $27.14 after Moody’s affirmed its Aaa rating and the company said it was looking at ways to boost its capital position.

European stocks were sharply lower ahead of the open on Wall Street. The FTSE Eurofirst 300 index fell 1.4 per cent while the FTSE100 was trading 1.5 per cent lower. Asian equity markets closed mainly lower, led by a 3.5 per cent fall on the Hang Seng.

Bond yields fell as the market focused on the Fed’s Term Auction Facillity, a money market operation designed to encourage inter-bank lending. A $20bn term-loan auction was scheduled to start accepting bids at 10am.

The mininum bid rate for a 28-day loan was set at 4.17 per cent, much lower than the 4.75 per cent rate available at the discount window.

The yield on the two-year Treasury note fell 7 basis points to 3.25 while the yield on the 10-year Treasury also slipped 4bps to 4.20 per cent.

Inter-bank lending rates eased slightly ahead of the first Fed auction.Three-month Sterling Libor fell to 6.43 per cent from 6.50 per cent while three-month dollar Libor fixed at 4.94 per cent from 4.96 per cent.

The dollar continued its recent uptrend after last week’s higher-than-expected price index readings stoked worries about inflation and trimmed expectations of further interest rate cuts. The US currency hit a 10-week high against the pound, rising 0.2 per cent to $2.0130 and a six-week high against the euro, up 0.5 per cent at $1.4340.

Gold was trading $3.20 lower at $794.8 while the stronger dollar put pressure on oil prices early in New York. US crude declined $1.48 cents to $89.82 barrel.

Trane soars on Ingersoll-Rand deal

Merger and acquisition news was led by Trane, the heating and air conditioning systems company. Its shares soared 23.1 per cent to $45.80 after Ingersoll-Rand agreed to acquire the company for $10.1bn in cash and shares.

In other deal news, National Oilwell Varco agreed to acquire Grant Prideco, the drill pipe supplier, for about $7.37bn in cash and stock. Grant’s shares rose 15.6 per cent to $54.84 while National fell 5 .1 per cent to $73.39.

Adobe Systems, the software company, releases quarterly earnings data later today. The shares were trading 1.1 per cent lower at $41.66.

Loews, the US conglomerate, approved a spin-off of its interest in Lorillard, owner of the Newport and Kent brands, to form a separate publicly traded company. Loews’ shares rose 3.2 per cent to $48.30 in early trade.

In economic news, manufacturing activity in New York state declined sharply this month to hit a seven-month low. The New York Fed’s ”Empire State” index fell to 10.31 in December from 27.37 last month.

The current account deficit narrowed in the third quarter to the lowest level in two years, helped by continued strength in US exports. The deficit fell from $188.9bn in the second quarter to $178.5bn in the third, according to the Commerce Department.

Other economic data set for release this week include housing starts on Tuesday; GDP, leading indicators and the Philadelphia Fed survey on Thursday; and data on personal income and consumer sentiment on Friday.

The S&P 500 fell 2.4 per cent last week. The Dow Jones Industrial Average lost 2.1 per cent this week to close at 13,339.85, while the Nasdaq Composite declined 2.6 per cent over the week to 2,635.74.

The Russell 2000 small-cap index fell 4 per cent to 753.93 on the week, hurt by a rise in volatility