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Market Set to Give Back Yesterday's Gains

You'd be surprised at the how many people out there will sell on a rate hike, no matter how well telegraphed.

Those gains the market made yesterday, the ones that said as soon

Federal Open Market Committee

raised rates by 25 basis points today the summer rally would begin, look like they're going to get pared back a bit at the open.

Forecasting what will happen between the open and the FOMC's announcement is a bit of a mug's game, though. On one hand, the market seems to have fully priced a quarter-point hike. On the other, you'd be surprised at the how many people out there will sell on a rate hike, no matter how well telegraphed. Then there's the whole issue of whether the

Fed

will keep its tightening bias. And don't forget that there's some hugely important economic data coming up Thursday and Friday that will influence the Fed's decision on whether it should hike again -- what stocks do when the 2:15 p.m. EDT (or so) announcement comes out won't necessarily be what they should do.

"Any reaction is a knee-jerk reaction and we reassess tonight," said Bob Basel, director of listed trading at

Salomon Smith Barney

.

Further confusing the issue, the bond and stock markets appear to be heading into the market on different footing.

"Obviously, the equity market goes into this with a lot of enthusiasm," said Bill Sullivan, chief money-market economist at

Morgan Stanley Dean Witter

. "I think that point of view refers to building expectations that any restriction will be limited. The bond market is having trouble registering a similar impression."

At 9 a.m. EDT, the

S&P 500

futures were up 2. That's still more than 4 below fair value, indicating a negative open. The 30-year Treasury was off 5/32 to 88 23/32, putting the yield at 6.08%.

Comments from

Bank of Japan

officials suggesting that they are anticipating the day when they can reverse their easy-money policy sent bonds tumbling in Tokyo. Stocks followed, giving back all of yesterday's gains and then some.

BOJ governor

Masaru Hayami

, speaking before the lower house of the Diet, said two things that unsettled markets. First, he said that the Japanese economy has "clearly" stopped declining. Second, he talked of the day when the BOJ will reverse its zero-interest-rate policy. Following Hayami, BOJ vice governor

TheStreet Recommends

Yutaka Yamaguchi

suggested that the bank is worried that its easy-money policy could prove detrimental to the economy over the long run.

With chatter in the market about how Monday's

tankan

-- the BOJ's closely followed sentiment index -- will show improvement, Tokyo traders worried that an uptick in interest rates could be in their future. The yield on the benchmark Japanese government bond climbed to nearly 2% before falling back. At the Tokyo close, its yield was up 0.03 of a percentage point to 1.835%. The

Nikkei

fell 253.05 to 17,529.74.

Late-day futures-selling sent Hong Kong's

Hang Seng

to a sharply lower finish. The Hang Seng closed down 233.35, or 1.7%, to 13,352.14. But the weakness was concentrated in blue-chips. Advancers actually edged out decliners on the

Hong Kong Stock Exchange

, as investors scooped up second-tier and China-related issues.

Europe's major bourses were all higher. In Frankfurt, the

Xetra Dax

was up 31.08 to 5390.61. In Paris, the

CAC

was up 22.15 to 4525.98. In London, the

FTSE

was up 8 to 6315.1.

Wednesday's Wake-Up Watchlist

By

Brian Louis

Staff Reporter

  • Coca-Cola (KO) - Get Coca-Cola Company Report said it expects second-quarter worldwide case volume to fall 1% to 2% because of difficult global economic conditions and the impact of a temporary ban on its beverages in Belgium and France. The company said earnings per share in the quarter will reflect the loss of sales, but it didn't provide any figures regarding earnings.
  • Tellabs (TLAB) is acquiring privately held NetCore Systems for about $575 million in stock.
  • FDX (FDX) - Get FedEx Corporation Report posted fiscal fourth-quarter earnings of 73 cents a share, 2 cents ahead of the 11-analyst First Call estimate and up from the year-ago 57 cents. In other news (earnings estimates are from First Call):
  • Apollo Advisors' Leon Black has made a lot of dough this decade by scooping up distressed companies on the cheap, but lately, his timing's been off as some of the companies have run into financial difficulties after he bought them, the Heard on the Street column in The Wall Street Journal reported.
  • Disney (DIS) - Get Walt Disney Company Report and the government of Hong Kong this week will announce an extension of their talks regarding a possible Disney theme park there, the Journal reported, citing people familiar with the matter.
  • Energy East (NEG) is acquiring CTG Resources (CTG) - Get Computer Task Group, Incorporated Report for $355 million in cash and stock.
  • Home Depot (HD) - Get Home Depot, Inc. (HD) Report, a home improvement retailer, launched what it calls a customer-driven Web site, providing customers in part with project advice, tips and enhanced interactivity.
  • The Justice Department has launched an antitrust probe of the undersea cable business, involving some of the globe's biggest telecommunications companies, the Journal reported. The article said it couldn't be determined, however, which companies had been notified of the department's investigation.
  • Nautica Enterprises (NAUT) posted fiscal first-quarter earnings of 12 cents a share, beating the 14-analyst estimate by a penny, but down from the year-ago 23 cents.
  • Newcourt Credit Group (NCT) , which has been beaten up lately on jitters that its merger with CIT Group (CIT) - Get CIT Group Inc. Report would collapse, said that discussions were continuing with CIT.
  • Phelps Dodge (PD) - Get PagerDuty, Inc. Report announced a plan to reduce costs and improve operating performance by further curtailing higher-cost copper production, including the temporary closure of its Hidalgo smelter in New Mexico, restructuring certain wire and cable assets, suspending operations at Columbian Chemicals' carbon black plant in the Philippines and selling a noncore South African fluorspar mining unit. The moves will result in a nonrecurring aftertax charge of $61 million, or $1.05 a share, in the second quarter.
  • Qwest Communications (QWST) is expanding its strategic relationship with Nortel Networks (NT)
  • The Federal Communications Commission said it reached a proposed pact on conditions for approval of SBC Communications' (SBC) acquisition of Ameritech (AIT) - Get Applied Industrial Technologies, Inc. Report.
  • U.S. Bancorp (USB) - Get U.S. Bancorp Report, parent of U.S. Bancorp Piper Jaffray, is acquiring the investment bank unit of John Nuveen (JNC) . The division, which focuses on fixed-income investment banking, will become part of the operations of the U.S. Bancorp Piper Jaffray Fixed Income Capital Markets division.