Investors are still sorting out what the Fed's moves this week mean, but if you look at some corners of the credit markets, there are signs of thaw.
The reaction Wednesday across financial markets though was mixed. The equities market moved lower in part on concerns the Fed is running out of options, but the trading was relatively quiet. The dollar fell for a sixth day on worry the government is piling on too much debt to rescue the economy.
Oil dipped below $40 a barrel on fears of a global slowdown, even as OPEC tried to pump it up with the promise of bigger than expected production cuts. Gold, meanwhile, moved higher in a safe haven trade as the dollar fell.
The credit markets though loosened as investors showed more willingness to take on risk. Yields on short duration t-bills rose, while yields on longer duration Treasurys fell. In other areas of the credit markets, buying in mortgages helped drive rates lower and corporate bonds rallied. Libor yields fell.
On Thursday, markets will be watching the 8:30 a.m. release of weekly jobless claims data. The Philadelphia Fed survey is reported at 10 a.m. as are leading indicators.
Economic bellwether FedEx reports earnings ahead of the open as does Discover Financial, Lennar and Rite Aid. After the bell, some significant technology earnings are expected when Research in Motion and Oracle report.
Greg Peters, Morgan Stanley credit strategist, said the credit markets were already moving in their current direction. "A lot of it is year end effect. People are just chasing it," he said. But he noted the Fed's commitment to expand its program of lending and securities purchases is a positive for the markets. "I do think this coupled with what the new (Obama) Administration is currently doing and proposing, does make it seem like there's going to be a lot thrown at the problem," he said.
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"Corporates were really well bid. Money is coming in, and there's buying that makes sense to me," he said of Wednesday's trading.
Yet, he noted that some "credit spreads are wider than in the Great Depression and that doesn't make sense."
The fact that the Fed is willing to act will help the mortgage market even more. "From this mortgage program, you're going to see a radical move in mortgage rates. They bought a very small amount so far. We haven't seen anything yet," he said.
"The market moved in advance which by the way is what you want to have happen. The market is moving now that the Fed is there," he said. "They've been the only bid for risk, but you're starting to see this change. I've been encouraged over the past couple of weeks. This is just a move in the right direction."
The dollar fell another 1.8 percent against the euro to $1.4390 per euro, and lost another 1.6 percent against the yen. The yen finished at 87.40 per dollar. "It's a two-sided coin and right now the market is focused on the exploding U.S. deficits, and the idea of the government printing money," said Brian Dolan, chief currency strategist at Forex.com. "What it's ignoring is the steps the U.S. is taking to rejuvenate the economy and limit the extent of the downturn, which will ultimately see the U.S. recover faster than countries that aren't acting as aggressively."
Dolan said it's possible Japan could try to stop the strengthening yen. "We're at 13-year lows. The last thing Japan needs in addition to falling demand in its export markets is to see the yen go through the roof. I would not be surprised to see some form of verbal or other preliminary step of intervention today in Tokyo," he said. Dolan said some of the movement in the currency market is the result of year-end positioning by traders.
Dolan said an important technical level for the dollar is $1.46 per euro. If the dollar decline continues, G7 countries could step in to support the dollar and calm markets, he said.
Wednesday may have been quieter in the stock market, but look at the Chicago Board of Options Exchange's volatility index. It fell below 50 for the first time since Nov. 4. Patrick Kernan, who trades S&P 500 options, told us last week he also had seen signs of reduced volatility in the way options were trading.
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"It feels like it's going to be quieter between here and the end of the year. People have been selling options, banking on the fact that in the next two weeks there won't be that much volatility," said Kernan, managing partner at Cardinal Capital.
"However, personally I feel once we get into the New Year, everyone gets to generate a return. Once the new year starts, and last year's off the books. I think the volatility is going to pick back up," he said.
Kernan said there is a quadruple expiration Friday, and Thursday afternoon could see increased volatility as a result.
OPEC announced its biggest production cut ever, to no immediate avail Wednesday. OPEC said it was slashing 2.2 million barrels a day, on top of another recent two million barrel cut.
Oil fell $3.54 per barrel, or 8.1 percent to $40.06. Oil fell to its lowest level since July, 2004.
Cambridge Energy Research's Daniel Yergin said the price decline is probably temporary. "Unless the economy gets even worse, I don't think it's gong to be long lasting," he said. "I think these countries will desperately cut production to get the price back somewhat closer to their budgetary needs."
Yergin late Wednesday was on his way to London, where he will speak Friday to oil producers, members of OPEC and consuming countries. The London oil summit follows a similar gathering in Saudi Arabia earlier in the year.
"Countries like Venezuela and Iran are at the upper end and they need oil prices in the high 70s and 80s, and the Russian budget is pitched at $70 per barrel. For Middle East producers, its more like $50 per barrel," said Yergin, CNBC's global energy analyst..
Yergin said the Saudis have the most resilience. "I think what's going on throughout the whole oil industry, whether its companies or governments, people are prioritizing oil projects, cutting budgets and battening down the hatches," he said.
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