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Stocks Set to Rise as Bank Plan Emerges

Posted by Internet Guru
October 14, 2008

Major index futures pointed to a higher open Tuesday in a carryover of Monday’s powerful rally

U.S. stocks were indicated to open higher Tuesday as major index futures rose in premarket trading in a carryover of Monday’s historic rally. President Bush, in an address Tuesday morning, announced more details of the U.S. bank rescue plan, with the government investing $250 billion in nine major banks. Global markets were higher as banks in other countries shed light on similar actions.

Bonds were plunging, and interest rates rates surging amid signs central banks might be lending to one another, and that investors were willing to take more risks. The overnight dollar/Libor rate fell.

The dollar index was lower as the euro and pound sterling rose. Gold futures were higher. Oil futures were a bit higher as Saudi Arabia cuts output.

Tuesday’s action followed a powerful stock rally on Monday. At the close Monday, the Dow Jones industrial average soared 936.42 points, or 11.08%, to 9,387.61 — the biggest point gain ever. The S&P 500 index climbed 104.13 points, or 11.58%, to 1,003.35, boosted by shares of investment banking and brokerages and auto manufacturers. The Nasdaq composite index rose 194.74 points, or 11.81%, to 1,844.25.

President Bush formally announced the U.S. will follow the G-7’s rescue plan, taking “unprecedented, substantial” steps in order to preserve, not “take over” the free market. As expected, the U.S. government will take part in the coordinated rescue plan with new measures, including using part of the $700 billion Troubled Asset Relief Plan to help banks and insure new bank debt. The President also noted these measures will be temporary.

Among the firms expected to get funding: JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) were to receive $25 billion apiece; Wells Fargo (WFC) was to get between $20 billion and $25 billion; Goldman Sachs (GS) and Morgan Stanley (MS) were down for $10 billion each, and the Bank of New York (BK) and State

Street (STT) were slated for $2 billion to $3 billion apiece.

EU Commission President Barroso sees “light at the end of the tunnel”, but warned that “we are not there yet”. Barroso said “these are tough times for the economy”, but also added that “there are good signs that it can begin to turn”. The president voiced full support for the ECB’s handling of the crisis and said the EU’s budget rules allow for “flexibility in some exceptional circumstances”, such as the current financial crisis. The comments indicate that governments will have some leeway with regard to the stipulations of the stability and growth pact.

Treasuries were sharply lower Tuesday after the U.S> bond market reopened after the long holiday weekend. There has been massive unwinding of safe haven bets on expectations the U.S. will follow the G7’s rescue plan and announce it will buy interest in 9 major banks, guarantee bank debt, and insure non-interest bearing accounts. The 2-year note yield rose over 30 basis points to 1.95% in overnight trading. The 10-year yield climbed about 10 basis points to 4.077%, though the yield has dipped back to 3.98%.

Fed funds futures opened on target at 1.50% Tuesday after closing at 0.5% on Friday (the Fed was closed yesterday). The rate ranged between 0.125% to 3% on Friday with a 0.79% effective rate. The overnight dollar Libor rate was fixed at 2.181% versus 2.469% on Friday. Similarly, three-month Libor fell to 4.635% Tuesday, compared to 4.753%.

The easing in pressures in the money markets after the global bank rescue packages were announced is a good sign and suggests there is some thaw taking place, but the improvement to three-month maturity is marginal and the interbank lending situation is still very difficult as distrust and end of year financing continues to plague markets, according to Action Economics.

Original article: Stocks Set to Rise as Bank Plan Emerges From businessweek

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