The Wall Street Weather Forecast

Last week saw money seeding throughout the world from New York to New Zealand. In Europe, ECB pumped in money to help out financial institutions that have been cash-strapped by the sub-prime imbroglio. US and Australia followed suit. Soon it was Japan and South Korea. More need not be said.

The Fed delayed action left much to be desired and markets world-wide plummeted. By Thursday,Wall Street moved up on short covering. A technical rebound was long overdue. Then the Fed count the symbolic discount rate by 0.5 % and allowed loans for a duration of 30 days and not overnight. With that, fears were allayed and Wall Street shot up initially to 300 points. If not for the intervention of the authorities to prevent speculation, the Dow would have finished up 300 points.

Will there be follow through this coming Monday on Wall Street?

Every one knows sub-prime is not going away soon. Everyone knows unwinding of the yen carry trade will continue perhaps under less pressuring conditions. That another financial institution may be caught in a liquidity bind is not unforeseeable.

But the Feds are ready and on standby stations. Apart from the discount rate cut, they are continuing market operations by putting more money into the system. Their guarantee on Fannie Mae and Freddie Mac still stands to ensure the mortgage market continues to perform.

The fed rate is anticipated for a quarter point cut in September. This is seen to be more useful as it will help the mortgagee as well. Also it will allow cheaper funds for M&As to take place. The downside will be inflation worries and the fear that foreign governments might just dump Treasuries. Both will negatively impact economic growth.

Hurricane Dean's movement across the east coast of US and Mexico has pushed oil prices up. However, the sub-prime may cause many companies not to expand as planned and this could put a cap on oil requirements.

The comfort now is you have the central banks all working to restore their financial systems. The Fed is on standby and ready to act. There will be worries but it will be contained. As long as the majority perceives that the worse is over, the market can then start back on its journey towards the 14000 level.

Asian market should go up in reaction to the recovery in US and Europe.

We shall see how the Dow perform tomorrow night.

Heartsong