What is the perception of the government actions in the market?
Stan sent this question in the other day:
I just wanted to ask your perception of how the broader markets seem to be viewing the “meltdown”, “nationalization”, “bailouts”? – pick your buzzword of the day. I am a forex guy, not so much bonds and equities. So I tend to miss some of the pulse of the broader markets.
OK. Let me see how I can describe things.
First of all, the short-term fixed income market (money market) was really going nuts last week before the bailout stuff came down. At one point there were negative yields on short Treasury Bills, meaning a trader would have had to pay more than par value for the Bills. That’s a clear demonstration of how scared people were. They just wanted to make sure they were some place safe.
Once the bailout plan started to get leaked out on Thursday afternoon, the pressure on the money markets eased. It wasn’t all the way at once, but gradually the market has gotten back to more normal pricing. Basically, participants are no longer worried about a major meltdown.
The money market pattern was fairly similar to the one in the stock market. It was getting really ugly on at mid-day Thursday. People really thought there was going to be a major blow up. The VIX – the so-called fear index – was at it’s highest level since 2002. Stocks that hadn’t been on anyone’s radar before were getting hammered.
When the bailout talk started Thursday afternoon we got a sharp short-covering rally that carried into Friday morning. After that, though, things stablized. There are a lot of things going on with short restrictions, the details of the plan, money market fund protection, and all that. The market is trying to digest it all. All this stuff hasn’t brought the buyers back into the market – at least not yet.
Oil started rising Wednesday and hasn’t really stopped. Gold, however, has been all over the place. It was rallying during the meltdown in a flight to quality situation, but reversed like T-Bills did. I think the implications of the bailout have helped turn the metal higher again, however.
It’s a bizarre situation. After the initial reaction, it looks like traders started to look at things and wonder. There clearly wasn’t a great deal of thought given to the non-short list an it’s implications. How that all unwinds when the ban is lifted is going to be very interesting. I’m guessing there are a lot of folks who have just pulled out for a little while.
My general view of things is that this massive bailout plan is a recipe for problems down the line. I said to my colleagues that the movers on this don’t appear to be giving much consideration at all to the future. They’re just trying to stablize the system right now. I’d like to know if they even considered an alternate plan like the one I outlined on Friday.
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