First the Good News, Then the Bad News, Then the Good News …
Wednesday’s roller-coaster ride on Wall Street, which ended with a rally shortly before close of business, was fuelled by optimism that the draining effect of the recession may be abating. Better than expected data relating to housing and durable goods as well as the continued rally of the financial sector, offset to some extent the increasing concern by investors that U.S. authorities may not have what it takes to yank the economy out of recession, and may even be courting disaster by releasing large amounts of money into the economy which may trigger a rise in inflation.
Events contributing to the intra-day see-sawing stock markets experienced on Wednesday included the negative response to the proposal by Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner for tighter regulations on the financial industry. Then there was the news of a disappointing Treasury note auction, sparking concern by analysts that the countries supporting auctions previously, most notably China and Japan, may be losing interest in purchasing U.S. government bonds. With the Obama administration needing literally trillions of dollars to carry out their various recovery plans, it is believed that this lack of interest is likely to prove to be damaging to the U.S. economy. Earlier in March it was reported that Chinese Premier Wen Jiabao had expressed concern with regard to the safety of U.S. debt. However, the failure of a debt sale by the U.K. government indicates that this is not just a U.S. problem.
With banks due to benefit from the Treasury’s plan to finance private investor purchases of toxic mortgages, Bank of America climbed 6.7 percent, Wells Fargo rose 5.9 percent and JP Morgan climbed 8.2 percent. The encouraging data on housing and durable goods also reflected well on markets. The increase in durable goods orders was the first in seven months and the largest in more than a year. As the day drew to a close stocks rallied and reflected gains in both the S&P 500 and the Dow.
The U.S. Treasury is set to reveal the Obama administration’s plan to circumvent future financial crises, with stricter oversight of financial instruments, such as credit default swaps, expected to play a key role. No doubt investors are keen to see what effect this will have on markets.