Two Reasons the Markets Should Have Fallen Last Night


The U.S. Federal Reserve Bank and other key central banks have intervened to pump more money into the banking system.

The Dow rallied over 4.5% on the news. And it’s no surprise the Aussie market was over 2.5% before lunch time.

David Hefty, chief executive officer at Hefty Wealth partners, based in Indianapolis said, ‘The central banks are sending a message that they’ve identified the problem and that they are working together.’

The markets love hot money. And it’s easy to see why the market has gone up.

But there are two reasons why the same news could have caused the market to fall… and still could before the week is out…

First, ratings agency Standard & Poor’s downgraded 37 major banks.

S&P says this is more to do with how they assess a bank, rather than a reflection of the banks’ credit quality. Or so the press release says.

That should be bad news for banks. Not on this day. Goldman Sachs [NYSE: GS] was up 7.9%. Citigroup [NYSE: C] was up 8.9%. And Bank of America [NYSE: BAC] was up 7.3%.

Turns out that banking bailout beats credit downgrade.

Second, China unleashes 350 billion yuan into the system.

Last week, HSBC said China’s Purchasing Managers Index (PMI) would come in at 48 this month. The actual number released this morning was 49. (Anything below 50 is a sign of the manufacturing sector going backwards.)

It looks like the Chinese government had a sneak preview at the PMI data.

Before the official numbers were released, the People’s Bank of China reacted first. Lowering the reserve requirements for all banks by 0.5% (from 21.5% to 21%).

In short, the Chinese government is pumping $53 billion into the economy in an attempt to distract the market from data showing the economy has hit the wall.

Shae Smith
Editor, Money Morning

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From the Archives…

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Two Reasons the Markets Should Have Fallen Last Night