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Market Insider: Friday Look Ahead

The massive ice jam around credit markets is beginning to show signs of thawing under the heat of government intervention.

As investors are distracted by the wild gyrations in the stock, the credit markets this week are showing signs that a slow healing process may be taking hold.

The credit markets are "okay. It feels a little better today," said Greg Peters, global head of fixed income research at Morgan Stanley. Libor, the bank to bank lending rate, continues to come down, and some key parts of the credit market are showing signs of improvement, including commercial paper.

The stock market, meanwhile, finished higher Wednesday, but not before making some big swings. The Dow ended at 9180, up 189, while the S&P 500 finished at 954, up 24.

Markets Mayhem

On Friday, investors can say goodbye to the worst month for stocks since October, 1987. The Dow is down 15.4 percent for the month, its 11th worst monthly performance ever. At its low for the month, it was down 27.4 percent. The largest Dow point swing ever was the 1018 point move on Oct. 10. Eight of the 10 biggest point moves for the Dow happened this month, and the average point swing was 605 points.

Expect more volatility on Friday. Investors will be watching for more impact from end of month trading as some mutual funds come to their year end and others rebalance. There will also be a few data points to watch, including personal income and spending, and the employment cost index, all at 8:30 a.m. Chicago Purchasing Managers data is released at 9:45 a.m., and consumer sentiment is reported at 10 a.m.

Fed Chairman Ben Bernanke speaks on mortgage finance at 2 p.m. to a conference at the University of California at Berkeley.

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There are a few earnings reports Friday, including Chevron, Clorox, Cummins, Nissan, and Weyerhauser.

Month End Haunts Halloween Market

Traders say the end of month phenomena has been driving stocks all week. Brian Dolan, chief currency strategist at Forex.com, said he expects it to be evident in Friday's trading too although there's already been a lot of related activity. "I would look to see dollar strength overall. I think you're going to see some pretty strong movement in stocks. I would look for stocks all over to trend higher. Dollar yen is likely to move up on that," he said.

"The U.S. funds will need to sell dollars across the board in order to re-hedge, and European funds will need to sell euros across the board in order to re-hedge," said Dolan.

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He said for U.S. managers invested in Europe saw declines of 20 percent or more for the month in major European stock markets, including currency return. Tokyo was down 14 percent. For Europeans, including currency return, the S&P was down 14 percent and Tokyo was down 7 percent in October.

The dollar versus the euro moved in an incredible range of about $1.28 to above $1.32 per euro and back again. It finished at $1.2923 per euro. "On a 24-hour basis, it's pretty much unprecedented. That's been very closely tracking the stock market movement," he said.

Dolan estimated that there could be $40 to $50 billion flowing into the U.S. stock market because of the end of month rebalancing. "What we do know is that the talk on the street is these flows are going to be massive," he said. " ... The losses have really skewed foreign investors' asset allocation models."

"The flows are going to be pretty much one-sided in favor to the U.S. dollar. European asset managers are going to need to buy dollars to buy stocks," he said Thursday. "It's going to be an interesting 24 hours."

The dollar rose 1.3 percent against the yen Thursday to a level of 98.4349 yen per dollar. The yen will be a focus Friday following the Bank of Japan's meeting early Friday. News reports this week indicated the BOJ could cut rates.

Credit Uncrunching

Miller Tabak's Tony Crescenzi points out that the spread Thursday between the two-year Treasury and 30-year was at widest since March.

Crescenzi also said, in a note, that the 270 basis points spread is a sharp increase from September when it was at 200 bps. He said the spread should continue to widen and that the steeper curve should help banks. "A steeper yield curve also tends to precede more prosperous times for the economy," he wrote.

Peters said he is seeing some signs that credit markets are doing better though mortgages still lag. He said he believes we've now seen the "widest" spreads will get between Treasurys and other instruments. Corporate debt issuance is picking up although still pricing at a significant discount to the secondary market.

"What you're seeing is actually the reemergence, though tentative, of risk taking," Peters said. "You're seeing the real money guys starting to dip their toe in."

"You're seeing the Fed cut, and I view that as a positive thing ... Effectively that's what the Fed needs to do, as a historic way to reflate the banking system, is to have a steep curve. The way a bank makes money is through a steep curve," he said.

The Fed continues to take extraordinary measures to end the credit crunch. On Monday, it started its program to participate in the commercial paper market. On Wednesday, after it slashed rates by a half point, the Fed announced a new program to extend currency swap lines to several more countries including South Korea, Brazil, and Mexico. The IMF, at the same time, announced a new short term financing facility to add liquidity to emerging markets. The response to these measures was positive. Brazil's stock market, for instance rose 7 percent Thursday and Mexico's rose 5 percent.

"I think that's a positive too," Peters said. "What was under appreciated was the negative feed back loop on emerging market deleveraging. On the credit side, we weren't surprised by it because we've seen it time and time again."

On Tuesday, IMF First Deputy Managing Director John Lipsky spoke to a securities industry group in New York and told them that the emerging markets were the latest asset class to be caught up in the financial markets meltdown, after being the most resilient. He said growth in emerging economies is decelerating rapidly. He said risks of a global recession loom large but that the IMF and governments could help avoid a deeper downturn. Emerging markets had become the source of global growth as advanced economies, like the U.S. and Europe, slowed down.

"Asset price deflation has been hard on financial markets, creating concentric circles of crises that have propagated globally at a pace that by and large has taken market participants and policy makers by surprise," he said.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

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