Investors expect volatility as credit woes persist

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(Agencies)
Updated: 2008-10-06 09:44

NEW YORK -- The world's financial markets face an uncertain and possibly volatile week as investors await details about how the Treasury will implement the government's financial rescue package -- and watch for any further fallout from the credit crisis around the globe.

The markets have switched their focus to the world economy now that the $700 billion bailout plan has become law. And there's reason for their concerns -- governments across Europe are rushing to prop up failing banks. On Sunday, Germany said it would follow suit with Ireland and Greece in guaranteeing all private bank accounts.

Trader David O'Day works on the floor of the New York Stock Exchange before the closing bell, Friday Oct. 3, 2008. Stocks ended a volatile week with another sell-off Friday while credit markets remained strained after enthusiasm over the government's $700 billion financial rescue plan gave way to worries about obstacles still facing the economy. [Agencies]

Those steps are the latest sign that the troubles of US banks, which have all but paralyzed credit markets, are affecting the financial systems of other countries. Banks' hesitation to lend to one another and to many businesses and individuals is the consequence of the bad mortgage debt that the financial rescue is supposed to sweep up. But it's still unclear how quickly financial institutions will be able to hand that debt to the US government and convince the markets they are healthy again.

Wall Street looked to continue the volatility of last week when trading resumed Monday. Stock index futures declined by more than 1 percent late Sunday, pointing to a lower open. Dow Jones industrial average futures fell 176, or 1.70 percent, to 10,188. Standard & Poor's 500 index fell 19.3, or 1.74 percent, to 1,089.00, while Nasdaq 100 futures fell 20.25, or 1.37 percent, to 1,457.25.

Doug Roberts, chief investment strategist at ChannelCapitalResearch.com, said the steps taken by governments abroad are welcome because a broad response, not simply the US bailout, is needed to help steady the world's financial system.

"A lot of the actions that are occurring overseas are good," he said. "What you really need now is stabilization and that really comes from the government."

Roberts said the Federal Reserve and other central banks likely will continue to move in as needed to help shore up the markets. But he thinks bringing lasting calm to credit markets and financial institutions will take longer to work out than many observers predict.

"This is much more expansive than anybody is assuming," said Roberts. "I think that this whole bailout bill is the first step in a series of steps."

Still, he said policymakers likely will try to hold off on moves like rate cuts until they determine they have little choice. The fear, he said, is that the market could be unimpressed and policymakers would have few tools left to restore investors' confidence.

"If one doesn't work what are you going to do for an encore?"

Roberts and other market watchers say it's possible that the Fed, and perhaps other central banks, could cut interest rates this week -- ahead of the central bank's scheduled meeting at month's end -- if the credit markets don't show signs of life. With oil prices well off their midsummer highs and indicators pointing to a slower economy, the Fed's worries about inflation are less than they had been, making it easier to justify a rate cut.

With so many unknowns, it's likely to be a choppy ride on Wall Street for some time as the Treasury Department starts flexing the new powers granted by the financial rescue, which President Bush signed into law Friday shortly after the House passed a sweetened bill on the second try.

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