Markets calm down despite the craziness
— -- Investors pushed up the stock market and calmed down the bond market Thursday on the growing realization that Congress is likely to approve the financial system bailout package in a form close to what the Treasury recommended.
Investors can't decide whether to celebrate or hunker down as the nation's leaders fight over plans offering help to the financial system.
Stock investors applauded and bond investors relaxed a bit on reports Thursday that Congress was nearing an agreement on the $700 billion bailout plan.
But after the close it became clear a congressional compromise was still far off, showing that timing of a bailout announcement and the details of what it will include could remain a big uncertainty for financial markets.
"Something needs to be done," says Oliver Wiener, trader at investment management firm BTIG. Investors' initial approval of a possible deal Thursday was evident in the:
•Stock market. The Dow Jones industrials rose 197 points, or 1.8%, to 11,022 and the Standard & Poor's 500 index rose 2.0%. But unease remains. Stocks are below where they were Sept. 18 when investors originally heard of the plan. And the CBOE Volatility index, a measure of investor fear, is higher than it was Sept. 16.
•Credit markets. Debt investors, rattled Wednesday night by protracted debate in Congress, calmed down Thursday. The three-month Treasury bill, snapped up by edgy investors all week, sold off to push the yield from 0.49% to 0.72%. "We see the improvement in many gauges," says Tony Crescenzi, strategist at Miller Tabak.
•Financial sector. The Financial Select Sector SPDR exchange traded fund, which tracks bank and brokerage stocks, rose 2.8%. The CDR Counterparty Risk index, which measures concern about the health of leading banks and brokerages, eased 1%.
But the nervousness is still far from being erased, especially among bond investors, says Julian Mann, vice president of First Pacific Advisors. "When politicians are smiling, I get nervous," he says.
The overnight index swap rate, a measure of how much brokerages and banks charge each other for money, is higher than it was last week, Mann says. And banks and investment banks increased their borrowing from the Federal Reserve in the week ended Wednesday.
Meanwhile, companies are grappling with how to raise money. General Electric said it will cut its reliance on selling commercial paper, a popular way for solid companies to borrow relatively inexpensively. The Fed said that commercial paper shriveled $61 billion, to $1.7 trillion the week ended Wednesday. It was the biggest drop since August 2007, Crescenzi says.
Until the details of a bailout are actually announced, "There is still residual skepticism," says Wan-Chong Kung, fund manager at FAF Advisors.
Asian stocks today showed some caution over the delayed bailout: In Tokyo, the Nikkei average rose slightly, 0.2%, in early trading.
Meanwhile, the Labor Department said the number of people seeking unemployment benefits increased by 32,000 to a seasonally adjusted 493,000 last week — the highest level in seven years and well above analysts' expectations of 445,000. Hurricanes Ike and Gustav added about 50,000 new claims in Louisiana and Texas, the department said.
The Commerce Department said sales of new homes fell sharply in August to the slowest pace in 17 years. The average sales price also fell by the largest amount on record. New homes sales dropped by 11.5% in August to a seasonally adjusted annual sales rate of 460,000 units, the slowest sales pace since January 1991.
The department also said orders for expensive manufactured goods sank in August by the largest amount in seven months as demand for both airplanes and cars sank. Durable goods orders fell by 4.5% last month, far worse than the 1.6% decline that economists expected and the biggest drop since a 4.7% fall in January.
Overseas, Japan's Nikkei stock average fell 0.90%. Britain's FTSE 100 rose 1.99%, Germany's DAX index added 1.99%, and France's CAC-40 jumped 2.73%.
Contributing: The Associated Press