Crescenzi: 500-Point Rally Next Week?
Senior VP, Strategist, Portfolio Manager Pimco
There is a scenario that has a low but reasonable chance of occurring next week that could result in a very large rebound in share prices and risk assets next week and the week after, say 500 points or so in the Dow. Here it is ...
If the G-8 delivers a communiqué strong enough to reinforce the recent message on the dollar, and if OPEC's meeting with consumers results in more oil production, the combination could boost the value of the dollar, jolt the commodities markets, and thus bring a huge sigh of relief to investors. U.S. Treasury Secretary Paulson has resisted opportunities like this before, particularly following the April 11th G-7 meeting, which produced a communiqué that French Finance Minister Lagarde said was on par in importance with the 1985 Plaza Accord. Any effort to boost the dollar would be welcome worldwide, given the recent surge in commodity prices. Massive intervention would cap it off.
I recognize that governments are powerless against the markets (the currency market sees daily volume of $3 trillion per day) and that currency values are set by fundamentals, but there are times when leadership, guidance, and hand holding are needed in the financial markets. Combining short-run strategies such as this with long-term strategies can be effective, as seen recently in the Federal Reserve's adoption of liquidity provisions as a short-term strategy and use of the fed funds rate as a long-term strategy.
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Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the co-author of the just-revised "The Money Market" and "The Strategic Bond Investor."