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Government Pulls Out All the Stops, But Traders Still Believe in Perfect Storm
Wed, Sep 17 2008, 16:01 GMT
by Kathy Lien
The US government is pulling out all of the stops but the market is not convinced that the storm has passed. The price action in everything from stocks, bonds, the US dollar and gold indicates that every new rescue is having less of an impact. The government's shock factor is disappearing. In addition to spending $85B to bailout AIG, the SEC has also issued new short selling rules that prohibits naked short selling in all US equities. Their goal is to reduce volatility and so far, it hasn't worked.
Investors around the world are still nervous and not willing to take on counterparty risk. Trust is a commodity these days. LIBOR rates increased by the most in 9 years, indicating that banks have become extremely cautious about lending. US Treasury 3 month bill rates fell by the lowest amount in 54 years, while the 2 year swap rate hit a record high. Gold prices surged more than $50 an ounce. The TED spread, which is the difference between what banks and the Treasury pay to borrow hit the widest level since Black Monday in 1987. The degree of these move proves that there is still a significant amount of risk aversion in the markets.
In times like this, there is no safer asset than gold and we am sure that Sovereign Wealth Funds who may have been burned in their US investments are finally realizing this. It is time to overweight gold and underweight anything else. The clearest trade in the currency market is still short USD/JPY because none of the Fed's efforts have stabilized the market. With the market looking for a potential buyer for Washington Mutual or even Morgan Stanley, the problems in the banking sector are not going away. As for the dollar's outlook against the Euro and British pound. The offsetting factors of US repatriation of foreign investors dumping their US investments should keep the EUR/USD and GBP/USD range bound.
Here's some info to keep the intraday price action that we have seen today into perspective:
| Index | Today's Change* | Significance |
| S&P 500 | -45 points | Hits 3 Year Low |
| DJIA | -343 points | Hits 2 Year Low |
| Gold | +$53 or 7% | Biggest Gain Since 2/00, Highest Since Aug |
| 3M LIBOR Rate | +19bp | Largest Rise in 9 Years |
| TED Spread | 70bp | Widest Since Black Monday (1987)! |
| *As of 11:30am ET |
Published on Wed, Sep 17 2008, 16:05 GMT
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