The stock market is on its own wild ride these days, but if investors were to step off the roller coaster for a minute, they might see signs of life in the credit markets.
Greg Peters, global head of fixed income research at Morgan Stanley, said credit markets have shown slight signs of thawing since major central banks stepped in to recapitalize banks and guarantee lending last weekend.
"I'm reasonably optimistic in here. I think you have to believe the governments will do whatever it takes to stabilize the system. If there continues to be funding pressures, there'll be additional things thrown at the system," said Peters. "I think you have to put your faith, which is hard to do in this environment because there is no faith, in the central banks ability and Treasury's ability to work things out."
Markets Friday will be watching housing starts data at 8:30 a.m. and consumer sentiment, released at 10 a.m. These reports are important because intense worry about the health of the economy and the consumer, specifically, has been the backdrop for the stock market's huge intraday moves.
President Bush speaks on the economy to the U.S. Chamber of Commerce at 8:40 a.m. Chicago Fed President Charles Evan speaks on the economic outlook at 2 p.m. and takes questions.
There are a few earnings Friday, including Honeywell , Gannett and Schlumberger , and the market may still feel the glow of Google's Thursday afternoon upside earnings surprise. Google profits rose to $1.35 billion, or $4.24 per share, better than expected by analysts. Google shares rose, along with IBM , in the after hours session. IBM reported profits of $2.8 billion or $2.05 per share.
700 Is the New 300
The stock market is getting used to a heightened level of volatility but certainly not this level. A more than 800-point swing in the Dow Thursday took it from a more than 5 percent decline to a sharp gain of 4.4 percent, or 401 points. The S&P 500 was up 38 points, or 4.25 percent to 946, and the Nasdaq was up 89 or 5.5 percent to 1717.
"I think what we've got is a situation right now where people don't know what to do," said Tim Smalls of Execution LLC. "The reality of it is there's value. What we really need is a couple of days of quiet and calm. That way people can make an informed decision instead of just making emotional decisions. That's not in the cards right now, not while we've got expirations." S&P 500 options expire Friday.
Smalls said he learned an important lesson from last weekend, which was followed by Monday's record up move. "What last Friday taught me was people are going to be afraid to go home over the weekend short. Maybe the news flow will come out positive," he said.
Last weekend, traders went into the weekend worried about Morgan Stanley's deal with Mitsubishi and fearful of forced selling by hedge funds. Central bankers decided over the weekend to inject funds into European banks over the weekend, and by Monday the U.S. looked poised to follow a similar path.
Traders Thursday were talking about the VIX, the Chicago Board of Options Exchange's Volatility Index, which hit an all time high of 81.17 before settling back to 67.61. The VIX is considered Wall Street's fear meter.
Credit Slightly Un-Crunching
Peters said the recovery in credit markets will happen slowly. "It's all about sequencing, which means you see a steady improvement in funding, and you are. That's more important than what's happening on the equities side. The equities market doesn't really understand. It's late to the party," he said.
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Since last Friday, two-year swaps have come in 11 basis points; Libor/OIS is 24 bps tighter, and the TED spread is 56 bps tighter, he said.
"I think you just have to think about it directionally, and you have to be patient. A lot of people wanted an instantaneous snap back in Libor, for example. That would be indicative of a bad environment. What you want is slow and steady," he said.
Libor is the bank to bank lending rate and affects many commercial and consumer loan rates. It has been gradually improving all week.
"I think the forward market is telling you Libor will be coming down. By November and December, you'll see a much more normalized Libor environment. We're thinking it's going to take a steady progression over the course of a month or so " he said.
Miller Tabak's Tony Crescenzi pointed out in a note Thursday that there were also some signs of stirring in the corporate bond market, where PG&E was doubling the size of its expected $300 million offering and Occidental Petroleum increased its $750 million offering to $1 billion.
Another positive sign traders pointed to was a big drop in commercial paper rates.
One sign that there is still a lot of distrust in credit markets is the rush of buyers into T-bills, which continue to find strong demand, particularly in the one- and three-month durations.
"Treasury bills are raining from the sky," said RBS Greenwich's James Galluzzo, who trades T-bills. A record $194 billion have been issued this week and another $60 billion is expected.
Ultimately, the Treasury will have to go further out the curve and issue longer dated securities, traders have said.
"For the time being, you feed them where they're hungry and they're in the short stuff, and even though there's inefficiencies in the bill market, it seems to be the most efficient way to do it," he said
"Until the collateral situation changes, and I don't know when that's going to happen, that's what's driving the bus. Clearly, there's overwhelming demand for Treasury collateral," he said.
Oil continues to fall sharply, which is one bright spot stock traders have been pointing to. Oil lost another $4.69 per barrel, or 6.3 percent to $69.85 per barrel Thursday.
Tom Kloza, chief oil analyst at OPIS, said in a note that he sees crude settling down between $50 and $75 per barrel. He said the last time oil was at the $75 per barrel level in September, 2007, gasoline was averaging $2.78 per gallon at the pump.
"You can count on gasoline fetching a very small premium to crude oil in the next 90 days or more. That means that a crude oil price level of $70 bbl probably translates to retail gasoline prices of $2.75 gal or less; a crude price of $65 bbl extrapolates to perhaps $2.50-$2.75 gal; and a crude price of $60 bbl equates to something under $2.50 gal," Kloza writes.
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