The bad news that was scaring the markets has, for now, become the good news. Remember Monday. Things were dire. The major stock indexes were in a tailspin, sinking to a level 10% from October's highs, technically a correction. But that's all changed, and in part it's because the markets are now convinced the Fed recognizes what ails it.
Comments from Fed Vice Chairman Donald Kohn Wednesday show the Fed has joined the team of worriers. Kohn's comments indicate the Fed sees the potential for a significant downturn. The Fed realizes there's dysfunction in the credit markets, and it is open to cutting rates to stave off deeper economic problems.
On Thursday, Fed Chairman Ben Bernanke speaks and traders will be listening to see if he echoes Kohn's comments. The view from the Street is that he will, and traders are convinced the Fed will cut a quarter point Dec. 11. However, there's already an enthusiastic group ramping up expectations for a half point cut. Bernanke speaks after market hours, at 7 p.m. in Charlotte, N.C.
Renewed Confidence in the Fed
Earlier this week, there was a lot of grousing that the Fed was out of touch, and that its view that it does not have to take action was just wrong. Kohn soothed things over at least in the eyes of some investors.
"As the Federal Open Market Committee noted at its last meeting, uncertainties about the economic outlook are unusually high right now," said Kohn. "In my view, these uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."
"In the conduct of monetary policy, as Chairman Bernanke has emphasized, we will act as needed to foster both price stability and full employment," he said.
The Dow jumped 331 points or 2.55%. But the stock market was already off to the races Tuesday, after news the Abu Dhabi Investment Authority was investing $7.5 billion in Citigroup . That news injected much needed confidence into a market fearful of trouble in the financial sector. The Dow jumped 215 points on Tuesday. Its combined 5.3% move is the best two day move in the Dow in five years. Wednesday's percent gain was the best one-day gain since April, 2003.
The Nasdaq was up 3.2% Wednesday, and the S&P was up 2.9%. Treasurys were under selling pressure Wednesday as money moved into the equities market. The yield on the 10-year moved above 4.0% for the first time since Monday and was at 4.025%.
The dollar gained 0.2% against the euro, and the 1.1% against the yen.
Besides anticipation around Bernanke, markets will be watching the release of third quarter GDP Thursday morning. Jobless claims are also reported at 8:30 a.m. New home sales are released at 10 a.m.
Some big names report earnings Thursday. Sears reports in the morning, and Dell issues its report after the closing bell.
Oil Drill Down
Oil continued its steep decline. NYMEX crude finished at $90.62, off $3.80 or 4%, the biggest drop since August 5. Oil is now down 7.7% from its record close of $98.18, hit on Nov. 23.
John Kilduff, senior vice president of M.F. Global says he still believes oil will rise to a $100 per barrel level by year end despite the sell off. "This is all the fast money running out of the market," he said. The selling is caused by "a couple of things. It's definitely some profit taking, with the end of the year it's probably one of the places where portfolio managers had profits, and you're seeing pressure that way. And there's some real concern about these economic headwinds, or an overreaction to them in my view."
Kilduff, a CNBC contributor, says OPEC will likely add 500,000 barrels per day to its production when it meets in Abu Dhabi next week. "there's a whisper number of 850,000 to a million," he said. He also does not expect OPEC members to say much about the dollar when they meet next week. "I think they're realizing that they're doing themselves more harm than good. But I think behind the scenes they'll look at measures to diversify out, but I think they'll try to keep it more quiet this time."
Note to Readers
I will be away until Wednesday Dec. 5. Marketinsider will return that day.
Questions? Comments? firstname.lastname@example.org