Rescue bill leaves investors still shy about risk

NEW YORK (Reuters) - Investors' appetite for risk was not immediately whetted by the passage of a $700 billion bailout package for the U.S. financial system on Friday, and expectations for a rapid recovery in stocks, corporate bonds, even the dollar, are likely misplaced.

Stocks, corporate credits and the dollar defied many predictions for a large-scale relief rally on passage of the measure.

The Dow Jones industrial average was up 300-plus points, or nearly 3 percent, ahead of the vote but slipped to trade nearly flat after the U.S. House of Representatives cleared an amended bailout package, which had passed the Senate on Wednesday.

The credit markets, which had seized up two weeks ago following the tightening of the commercial paper market, saw some signs of stabilization, albeit briefly.

The benchmark U.S. investment grade credit derivative index tightened 10 basis points to 160.5 basis points ahead of the vote, but moved in sympathy with stocks, widening 5 basis points after the vote.

"The markets are still paralyzed," Loomis Sayles' Dan Fuss, one of the most widely followed U.S. bond managers, said after the vote.

"We need confidence back in these markets and that really takes time," he said.

It's not just confidence and time, however.

The dramatic slowdown in the U.S. economy also has continued to keep financial markets under pressure. The Labor Department said Friday that companies shed 159,000 workers last month, the fastest pace in more than five years.

"Success of this bill means that you've stopped a total collapse of the financial system, which is where we were rapidly headed, " said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut.

On Friday, President George W. Bush signed the landmark financial industry bailout bill after it was passed by the House of Representatives earlier in the day.

Eyeing both the November 4 elections and stock market indexes, the House voted 263-171 to approve the largest government intervention in the financial markets in decades.

RESCUE BILL -- AND NOW RATE CUTS?

A growing number of money managers and economists are now calling for sizable, global rate cuts to accompany the rescue bill. On Thursday, the Wall Street Journal said in an unsourced story that Federal Reserve officials were weighing further interest rate cuts, even if Congress approved the rescue bill, because of the worsening economic outlook.

"Now that Congress has approved the package, we are likely to see a series of other policy announcements and actions," added Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. in Newport Beach, California.

Interest rate futures show dealers are betting that the Federal Reserve will lower its benchmark lending rate by one-half point, to 1.5 percent, at or even before its Oct 28-29 policy meeting.

Even European Central Bank President Jean-Claude Trichet was shifting his rhetoric on Thursday. Trichet said ECB policy-makers recognized "the extraordinary high level of uncertainty stemming from latest developments" on turbulent financial markets and the credit crunch.

"Economic activity in the euro area is weakening with contracting domestic demand and tighter financing conditions," he said.

(Additional reporting Karen Brettell in New York and Ros Krasny in Chicago; Editing by Andrea Ricci)