Global stocks rebound but credit markets jittery

NEW YORK Thu Aug 11, 2011 6:48pm EDT

1 of 15. Traders work on the floor of the New York Stock Exchange, August 11, 2011.

Credit: Reuters/Brendan McDermid

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NEW YORK (Reuters) - Investors swooped back into world stocks on Thursday, picking up beaten-down shares after a mildly encouraging U.S. jobs report dulled fears of recession, although credit markets faced strains similar to those that preceded the 2008 credit crisis.

U.S. stocks rallied more than 4 percent, picking up steam late in the day and reversing the previous day's losses. Shares have whip-sawed all week and the Dow traded in a range of more than 400 points for a sixth straight day.

The broad S&P 500 is still down about 14 percent from its 2011 closing high set on April 29.

"It's a bungee cord market. We've fallen off of a small bridge, the bungee cord bounced us up, and oscillations will diminish, but we're still bouncing around," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.

Gold and the Swiss franc -- which have soared as investors shied away from risk -- both fell. However, each had additional factors influencing their lack of appeal.

Gold faced its biggest daily loss in over a year on profit-taking and an increase in trading margins. Gold futures fell 2 percent to $1,748 an ounce.

The Swiss franc tumbled after the Swiss National Bank said it could ease monetary policy further. Markets focused on the possibility of a temporary peg between the franc and the euro to rein in the soaring Swiss currency.

The sanguine view in the equity market contrasted with nervousness in the short-term funding markets.

The London interbank offered rate, LIBOR, on three-month dollars, the benchmark rate for $350 trillion worth of financial products worldwide, reached fresh four-month highs.

"That is purely a reflection of interbank funding, so it reflects sentiment on whether or not there could be a potential crisis in the funding markets. Every time there's a crisis that's usually what people look at first," said Kenneth Silliman, head of U.S. short-term rates trading with TD Securities in New York.

The U.S. Treasury sold $16 billion worth of 30-year long bonds at a poorly received auction, with investors showing the weakest overall demand in 2-1/2 years and foreigners largely steering clear.

In the open market, the 30-year bond lost 5 points in price immediately after the auction results. The benchmark 10-year note suffered along with 30-year bonds. It last yielded 2.32 percent, up from 2.14 at Wednesday's 10-year auction.

The MSCI world equity index gained 2.9 percent.

The Dow Jones industrial average gained 423.37 points, or 3.95 percent, at 11,143.31. The Standard & Poor's 500 Index was up 51.88 points, or 4.63 percent, at 1,172.64. The Nasdaq Composite Index was up 111.63 points, or 4.69 percent, at 2,492.68.

U.S. financial shares led the way up after taking a beating in the previous session on rumors of trouble at French banks. A 16 percent surge in Cisco Systems also helped sentiment.

Legendary investor Warren Buffett told Fortune magazine he has been buying during this week's sharp market declines and has not yet seen anything that suggests another economic downturn.

TEMPORARY COMFORT

The spike in the LIBOR rate, a key measure of the cost for banks to borrow from one another, raises the question of whether the current funding difficulties may foretell a repeat of the 2008 credit crisis, when vital arteries of global finance seized up.

In the credit markets, the cost of insuring French bank debt hit new records, a sharp contrast to the upbeat stock market picture.

Stock markets were comforted as U.S. initial claims for state unemployment benefits fell last week to the lowest level since early April. Analysts said one week was not enough to show definitive improvement in the struggling labor market, but the better-than-expected data was a welcome surprise.

"Had we seen a jump (in claims) it would have reinforced recession fears. What we've seen here is not anything to allay those fears, but just to set them aside temporarily," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

The anemic pace of U.S. first-half growth has fueled worries of another recession, and analysts are watching for signs the recovery could pick up steam in the rest of 2011.

Oil prices rose for a second day in a row, gaining alongside equities. U.S. September crude settled up $2.83 at $85.72 a barrel.

(Additional reporting by Richard Leong, Karen Brettell and Caroline Valetkevitch; Editing by Dan Grebler)

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Comments (20)
NukerDoggie wrote:
Confidence – no financial system will run without it. And investors are losing confidence in Europe’s debt-burdened states and now in its exposed banks. They are losing that confidence a lot faster than they are losing such confidence in the U.S. Right or wrong, those are the facts.

So they are pressuring Italy, Spain and other sovereign bonds and now also French and German banks. Unless Europe’s leaders very quickly (in the next few days) do something grand to completely stabilize the system and bolster investor confidence once and for all, then Europe’s financial system is going to come crashing down.

They aren’t going to do something big and comprehensive because Germany lacks the will to pony-up the big bucks it would take.

This is going to end in disaster, perhaps as soon as the end of this week.

Aug 10, 2011 12:04am EDT  --  Report as abuse
Neurochuck wrote:
“The market is in a bit of heat-seeking missile mode looking for vulnerabilities around the world”
What a good quote from the trenches.
Getting German taxpayers to pay the debts of French bankers who got a bit reckless at Italian bungabungas not looking easy.

Aug 11, 2011 1:11am EDT  --  Report as abuse
breezinthru wrote:
“Each selloff is effectively a cry for help to politicians and central banks to reach a solution to the debt crisis,” Jimmy Yates, head of equities at CMC Markets, said.

“Reach a solution” connotes an on-going negotiation between parties representing competing viable solutions. It would have been more accurate for Mr. Yates to have said “find a solution”, because no one has a viable plan.

Quite simply, no viable plan exists. No viable plan can be formulated.

The debts and liabilities of many European economies and banks are so massive and the systems that accumulated those debts are so far beyond quickly becoming financially sound that any country that volunteers funding for stability purposes will be swallowed into the abyss.

Aug 11, 2011 8:09am EDT  --  Report as abuse
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