It remains to be seen whether the Fed’s latest efforts to get credit markets functioning again will work. But the efforts have certainly yielded immediate results on the stock market.
Just a day after the Dow Jones industrial average and the broader S&P 500 were flirting with bear-market territory – defined as a 20 per cent drop from peak to trough – stocks roared back in early trading on Tuesday.
The Dow surged 232 points, or 2 per cent, to 11,972. All 30 stocks in the blue chip index were higher, but beaten up financials were the biggest standouts. Citigroup Inc. rose 9 per cent, JPMorgan Chase & Co. rose 7 per cent and Bank of America Corp. rose 5.8 per cent – surely instilling a nagging feeling among risk-averse investors that the long-awaited rebound in stocks is here. Maybe.
The bounce was by no means confined to the United States. In Canada, the S&P/TSX composite index surged to 13,248, up 243 points or 1.9 per cent. There, too, banks were among the biggest winners. Bank of Montreal rose 3.6 per cent and Bank of Nova Scotia rose 4.7 per cent.
In Europe, major stock market indexes rose higher. The U.K.’s FTSE 100 and Germany’s DAX index rose 2.2 per cent, adding to gains earlier in the day.
The widespread optimism from investors comes from an announcement by the U.S. Federal Reserve that it would take yet another step to free up credit markets. This time, the Fed will lend up to $200-billion (U.S.) to financial institutions for 28 days, rather than the usual overnight period.
“The market can now provide to the Fed the stuff that they don’t want (federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS) for the stuff they want (U.S. Treasury securities),” said Andrew Busch of BMO Nesbitt Burns, in a note.
“By suddenly and dramatically increasing the supply of Treasuries the Fed has driven yields higher and flattened the curve,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics, in a note. “The odds on a 75 basis point ease next week have dropped sharply too; the Fed will be happy. This will not turn the economy around or fix all the problems in the markets but it should reduce the liquidity issue, at least for now.”
