Market Insider: The Week Ahead
A slight thaw in the credit freeze could warm up some cautious buying in battered stocks in the week ahead.
But even so, the market will be subject to wild swings and could attempt to retest lows as
investors struggle with the idea of a weakening economy.
"Next week's going to be the week of truth," said Art Cashin, UBS director of floor operations. "We're going to watch not so much the economics. This is all about finance. We're going to see if money starts to move."
There is little fresh economic data, but a heavy calendar of earnings news will get the market's attention. Blue chips like American Express , Boeing , McDonald's , and Microsoft report third quarter results, as well as more than a quarter of the S&P 500 companies.
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Fed Chairman Ben Bernanke testifies on the economy on Capitol Hill Monday before the House Budget Committee. OPEC also holds an emergency meeting Friday, at which it is expected to discuss production cuts to battle the sharp drop in crude prices.
Stocks rose more than 4 percent in the past week, the best weekly gain since March, 2003. The week was so volatile that it included the best day since 1933 and the worst since 1987. The Dow finished up 401 points, or 4.75 percent to 8852, while the S&P 500 rose 41, or 4.6 percent to 940.55. This follows the prior week's record 18 percent decline.
Investor Warren Buffett gave the market a shot of confidence Friday when he said stocks are so beaten down that he is buying stocks for his personal account, which traditionally has held Treasurys.
Jerry Castellini, president of CastleArk Management said invesotrs have been sidelined by fear and he expects to see some hunting for bargains. He said he was buying the emerging markets etf this past week and battered natural gas stocks. "There's going to be some wake up next week when everyone goes: 'Wow, the financial system is now solvent again. It's October. I'm down for the year. I'm going to buy some of these beaten up names," he said.
"There's been too many distractions in too many areas for this to be a fair pricing of risk in the system. We may very well go back down again, but it has to feel like if you took Libor down to 3 percent, people would come out of the woods," he said.
It was the credit markets where the good news was happening by the end of the week, particularly in the area of short-term financing. Each day this past week, the rates on Libor, the closely watched bank to bank lending rate, continued to creep lower, and there were some signs of life in commercial paper market. Two year swap spreads have come down dramatically.
On Friday, traders reported that a major bank was actively lending in the interbank market. On Tuesday, the U.S. government announced it would guarantee interbank lending and said it was injecting capital into banks, similar to steps taken by other central banks.
"What you're seeing is incremental advancement," said Kevin Ferry of Cronus Futures Management.
"It is improving, if you look at the vital signs..But we haven't even moved the patient out of intensive care and into a normal room," said Ferry. He said if you look at eurodollar futures, which settle to three-month Libor, they show an optimism that Libor rates will continue to recalibrate and move lower.
"If you look at forward three-month settlement in the futures market they were moving in the 3 to 3.5 percent area. Now, they are moving to the 3, 2.5 level," he said. Three-month libor last settled at 4.419 percent.
Ferry expects to continue to see incremental improvements. "You'll probably see the government buying mortgage-backed securities and buying Fannie and Freddie paper," he said. Buyers have been flocking into one and three-month T-bill traders say that foreign central banks are among those buyers.
"Where are the foreigners? The great amount of agency paper they were buying, they are systematically moving away from agencies and moving into Treasurys. It's what I call the new conundrum," Ferry said.
While short term funding markets are showing small signs of life, spreads are still wide in the corporate and at at record levels in the high-yield market.
In Treasurys, the 10-year fell 27/32 for the week, raising its yield to 3.938 per cent. The two-year was yielding 1.624 percent. The dollar rose 1.2 percent against the yen for the week and was just fractionally higher against the euro at $1.3406 per euro.
For stocks to stabilize, traders say they need to see continued improvement in credit markets. "Does the stock market pop the champagne corks or not? Next week will tell us if there is a retest," said Cashin.