Once more, it's the noise coming from Washington Wednesday that could drive markets.
Stocks snapped back Tuesday, with the Dow recovering 485 of the 777 points wiped out in Monday's selling wave. Monday's sell off came after the House of Representatives voted down the $700 billion financial markets bail out package. Hope that the bill would be resuscitated before the end of the week sent stocks higher.
The S&P rocketed ahead to 1164, gaining back 58 points or 5.27 percent, more than half its losses. In addition to the idea that the bail out plan is back in consideration, other news from Washington helped bolster stocks. A positive was news that the Securities and Exchange Commission was working with FASB on new guidance on mark-to-market accounting, which affects the unwieldy piles of soured debt on financial firms books.
On Wednesday, the Senate is expected to take up a vote on the bail out plan at 7:30 p.m. The House is expected to return to the bill before the end of the week.
There's some important economic news to watch Wednesday, including September auto sales, released throughout the day.
Ahead of the open, ADP releases its employment report at 8:15 a.m., a sort of preview of Friday's government jobs report. ISM manufacturing data and construction spending are reported at 10 a.m.
Stocks were in an upswing, but credit markets remained in a deep chill Tuesday. LIBOR, the London Interbank Offered Rate, rose sharply Tuesday with the level for three-month dollar loans reaching 4.05 percent, from 3.88 percent Monday. LIBOR is the rate banks charge each other, and many consumer and business loans are tied to it.
Credit markets continue to fret about the status of the bail out plan and whether it will succeed. The fight in Washington has centered on the cost to taxpayers and whether it is really necessary to prevent an economic melt down. Congress has felt pressure from constituents worried about the cost of the plan, but some said they heard Monday from constituents worried about the cost of inaction to their 401ks.
The dollar, meanwhile, staged its biggest move higher against the euro in 7 years Tuesday. It was up 2.6 percent, at $1.4076 per euro. Traders say the weak European economy and worries about the health of European banks pushed the euro down.
Stock traders are already beginning to assess the damage that could come if credit markets don't unfreeze soon.
"I don't trust it. I wouldn't be buying stocks here," said one trader, who follows financial firms closely. He said buying volume picked up midafternoon Tuesday, but a lot of the chatter on trading desks was about the big dip down in some stocks just before the close Monday. "Half of this is a rally from the oversold condition on the close," he said.
The trader also noted that hedge funds will be facing redemptions and that could take a toll on stocks.
Wednesday is the first day of the fourth quarter, and Tuesday's strong performance leaves stock indexes in a much better position on paper than they would have been otherwise for the third quarter. The Dow was down 4.4 percent for the quarter, while the Nasdaq was down 9.2 percent. The S&P 500 was down 9 percent, its worst third quarter since 2002. The Russell 2000 was down 1.5 percent.
Airlines were the best performers for the quarter, up 27.5 percent, followed by housing up 16.8 percent. Of the S&P 500 sectors, consumer staples was the only one in positive territory for the quarter, up 1.42 percent. The worst performer was energy, down 29 percent, followed by materials, down 25 percent.
Crunching Main Street
We hear anecdotally that Main Street is being pinched by Wall Street's credit freeze.
AT&T CEO Randall Stephenson said Tuesday that his company was unable to sell commercial paper last week for terms longer than overnight. Commercial paper is a short-term corporate IOU and is the lifeblood of the business world. Companies unable to tap the commercial paper market must rely on bank lending, and from the action in LIBOR, we can see where that is heading.
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Stephenson explained that it is not the borrowing cost of commercial paper causing the problem, but a lack of buyers. He said the market loosened up a bit this week, but "it's day-to-day in terms of what our access to the capital markets looks like." This has made the company's managers more cautious.
"Your ability to plan for investment is obviously affected. You kind of don't know what your cost of capital six months from now is going to be," he said. "We'll just be very guarded, cautious in terms of where we invest, very guarded and cautious in terms of hiring and capital spending. We'll see where this situation goes."
Take those words of caution and spread them across corporate America, and you can start to see why the markets are so worried.
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