Market Leaps Nearly 900 Points, Eyes Turn to Fed Rates Today

Shortly after US markets opened yesterday, with the Dow hovering just over 8000, traders eyes flashed with opportunity. The broader market seemed very cheap and appealing.

The market was made even more attractive as many of the US government stimulus programs begin to kick in--banks are drawing on capital injections, companies on government commercial paper facilities, and bailout eligibility continues to widen.

The US government has effectively reached into almost every sector of the market at some level, removing significant risk from the markets.

These large injections of capital and simultaneous removal of risk kick in traders to make a steady climb to bring the Dow just over 9000 and raise broader indices 9 percent.

This rally has now extended into Asian and European markets stimulating a global rally on renewed confidence.

Now eyes turn to the Federal Reserve. The Federal Reserve with wrap up a two day FOMC meeting just after 2 pm ET. Expectations are that the Board of Governors will again give a healthy 0.5 percent cut to the Fed funds rate, sending it to a historic 1 percent.

The effect of this additional cut is to help continue the thawing of interbank, commercial, and to a lesser extent consumer credit. This rate cut is expected to have little effect on mortgage rates.

In fact, if there was a casualty of the market rally yesterday it was mortgage rates, which surged another 0.8 percent. This brings the average 30-year fixed rate mortgage just over 6.5 percent.

With so much government debt guarantees in the bond market yield spreads between mortgage bonds and other debt categories are dramatically spreading. A combination of money leaving the bond market for the rising equities market and avoidance of still toxic mortgage paper are likely to continue this trend in the immediate future.