The Senate's approval of the $700 billion financial markets bail out package should give stocks a short-term shot of confidence.
The Senate Wednesday approved the legislation in a late night vote. The bill is similar to one voted down by the House of Representatives Monday, but it contains amendments that were added in an attempt to appeal to some who opposed it. One major amendment was the addition of a measure that would increase the ceiling on bank deposits the FDIC can insure.
"I think a lot of the passage of this bill is in the market. but given the uncertainties of Monday, I think there will be some sigh of relief. All else being equal, this is a positive for the market tomorrow," said Blackrock's Robert Doll, in an interview on CNBC.
But the market will likely remain wary and volatile as the bill now moves toward a House vote Friday. Just take a look at Asian markets and the dollar -- both reversed earlier gains in the Thursday trading session after the Senate approved the rescue plan. Traders there say markets are nervous about what happens next in the House.
As the the credit crunch continues to sap the financial system, the pain is beginning to show up in economic reports. Auto sales in September, for instance, dropped a surprise 26 percent industry-wide as strapped consumers pulled back in spending but were also unable to find ready financing because of the credit crunch.
ISM manufacturing data, reported Wednesday, fell to 43.5 in September, its lowest level since 2001. But investors focused more on the action in Washington than on the economic news Wednesday.
On Thursday, weekly jobless claims are released at 8:30 a.m., and factory orders are reported at 10 a.m.
Much of the attention ahead of the open though will be on Europe, where the European Central Bank meets on rates. The ECB is not expected to make any changes, but after the meeting, ECB President Jean Claude Trichet speaks at 8:30 a.m. New York time.
Brian Dolan, chief strategist at Forex.com, said he expects Trichet to acknowledge that the euro zone economy is weakening. The euro this week has sunk against the dollar on worries about the economy, but also on reports of increasing troubles in the European banking sector. The dollar Wednesday rose 0.45 percent against the euro to a level of $1.4013 per euro.
"The longer they hold off lowering rates, the worse it's going to be for the euro. It's a kind of lose, lose situation at this point," he said.
Marc Chandler, chief currency strategist at Brown Brothers Harriman, said investors will be watching also to see what Trichet says about inflation. "I think the big focus is -- does Trichet do anything to prepare the market for a rate cut? ... A lot of people were watching for a rate cut early next year at the soonest. The burden is on Trichet to dampen that expectation," he said.
Conflicting stories about whether Europe would consider its own bail out plancrossed news wires Wednesday. "It's hard to get a handle on it," Chandler said. Trichet may be asked about it at his briefing. "His argument is that the Euro zone is not a true federation. It's just a monetary union. It's just central bankers. This is about fiscal policy. That's why Congress has to approve it."
He points out that the U.S., unlike Europe, is moving quicker than its normal pace to find a solution for the credit crises. But Europe's problems are different. Liabilities are larger. For instance, it took three countries to jump in to save failing Fortis.
"In the U.S., we are wrestling with the idea of too big to fail. What Europe's wrestling with is the idea of too big to rescue," he said.
Stocks were volatile Wednesday, with the Dow finishing off 19.59, a 0.2 percent decline to 10,831. The S&P 500 was down 5.3 points, or 0.5 percent to 1161. At its low, the Dow was off 2 percent. Three-month LIBOR, the bank to bank lending rate, continued its move higher, and credit markets remained constrained.
The credit crunch bit into Dow component General Electric Wednesday. GE shares were under pressure Wednesday morning as worries surrounded its financial arm. GE is the parent of CNBC.
But in the early afternoon, General Electric made a surprise announcement that Warren Buffett would invest $3 billion in the company in a perpetual preferred stock, yielding 10 percent. GE will also issue another $12 billion in stock, which some investors feared would be dilutive. GE stock recovered some losses but was still lower after the announcement.
GE, which reports third quarter earnings Oct. 10, reduced its outlook for the year last week. The company had pared back borrowing plans and suspended its stock buyback program. GE is the second blue chip name that found an ally in Buffett in the last week. He invested $5 billion in Goldman Sachs, and in fact he said GE approached him through Goldman.
GE CEO Jeff Immelt said the move "helps us play offense in this market" and the company continues to successfully meet its commercial paper needs.
Traders say GE's action shows the problem companies are having that rely on short term funding in the current credit freeze, as buyers step back.
Doll said the bail out package should alleviate some of the anxiety and hopefully get the commercial paper market moving. "Our immediate problem is to address the liquidity problems...We've got to get banks, number 1, lending to each other, and number 2, lending to grow our economy, and that's some steps away," he said.
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"It takes some of the black hole negative possibilities away, reduces fear and it encourages confidence, and hopefully we can begin to right the liquidity ship," Doll said.
John O'Donoghue, head trader at Cowen, said stocks will continue to be volatile. "I thought we put in a bit of a short-term bottom Monday, and I still think so. A lot of people are thinking that because we didn't get a lot of volume, we weren't there. The big gorilla in the room, though, that nobody wants to talk about is what the redemptions are going to do. That could be the final leg down," he said.
Many hedge funds are expected to have suffered double digit losses for the third quarter and the concern is that investors will pull their money, setting off a torrent of new selling.
Oil fell $2.11 per barrel Wednesday, or 2.1 percent to $98.53 per barrel. Gasoline fell $0.977 per share or 3.98 percent to $2.36 per gallon.
John Kilduff, senior vice president at M.F. Global, said the move shows that traders worry about the weakening economy now, more than supply.
"I think that the ability for those (weekly gasoline) inventories to rise in the face of 70 percent refinery operating rates and shortages in parts of the country is emblematic of the hunkering down across America on the part of consumers," said Kilduff.
"Oil's not making the cut any more in terms of being an 'under the mattress' (safe haven) investment play. It's not there with gold any longer. We're just waiting for the Chinese and Indians to start calling in with their bad news. If that happens, that's going to be it. The $86 mark is a very realistic downside target at this point," he said.
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