This morning's parallel with financial markets is obvious, of course. The announcement of the Agency bailout/rescue package/whatever it is has wrong-footed risk asset shorts, and the early anecdotal reports suggest that a few punters may be facing checkmate. Macro Man will leave the in-depth breakdown of the mechanics of the rescue to others, and instead focus his thoughts on what it actually means for markets and his portfolio.
After Friday's appalling payroll data, it looked like we were all systems go for an equity and FX carry meltdown. It certainly seems like the market deployed a lot of risk shorting stocks, EM, and yen crosses, at least during European trading. In retrospect it certainly looks like someone had the heads-up about the GSE bailout, given the sharp bounce in equities into the close. With Paulson's close ties to Goldman Sachs and Morgan Stanley having advised the government on what to do with the Agencies, Macro Man is left to wonder if the Chinese walls are actually of the Japanese paper variety.
Regardless, now that Bill Gross and foreign CBs have been made good by the US taxpayer...err....Treasury, we need to figure out what happens from here. It seems almost axiomatic that financials (ex FNM and FRE common, naturally) and broader equity markets will continue to rally for a few days. However, in Macro Man's view today's action doesn't necessarily alter the medium term dynamic.
The greatest impact of the weekend announcement will be psychological; it will do relatively little in the near term to clear the inventory of unwanted houses in the US, it could put pressure on regional banks via a hit to their holdings of preferred Agency stock, and does nothing to assuage the weak US labour market. Further afield, of course, Europe is still in a world of hurt, particularly with the financial Calvinists running the policy show.
Next week sees GS, LEH, and MS release Q3 earnings, and none of them will be helped by yesterday's announcement. Perhaps there is room for good news if Lehman can find a buyer, and of course GS will beat estimates like they always do. But overall, Macro Man would expect a fairly dismal set of figures.
Moreover, there is plenty of precedent not to expect too much support over a three month time frame from the bailout.