Financial Markets Rocked after Bailout Plan Rejected

The financial markets are rocked after US House rejected the $700b rescue plan today, by a vote of 228 to 205. Dow has the biggest drop ever of 778pts, 6.98%. S&P 500 tumbled 107pts, 8.8%, the largest fall since the 1987 stock market crash. Oil dived to over $11 to as low as 95.04 which gold once surged to as high as $932. The Japanese yen maintains a firm tone on risk aversion. Dollar gives back some earlier gains against Euro and STerling but extends strength against the high yielders Aussie and Kiwi. Canadian dollar had a roller coast ride today and reversed following weakness in oil.

President Bush said he's "very disappointed" by the defeat of the bailout plan. Paulson said he will use "all the tools at our disposal" to protect markets after the rejection. Fed immediately pumps an additional $630b into the global financial system, by increasing its existing currency swaps with ECB, BoE and BOJ to alleviate the banking crisis.

Note that Fed has been counting on TARP and TAF and tried to avoid further rate cut. But the failure of of TARP may eventually force Fed to cut rates again to save the economy. Interest rate futures are pricing in a 72% change of a 50bps cut by Oct, comparing with 32% odds a day ago. And beware of an intermeeting cut and any surprised rate by by major central banks around the world.

Technically speaking, the greenback remains firm against Aussie and Sterling. The recovery is EUR/USD is stronger than expected but isn't strong enough to invalidate the view that corrective rebound from 1.3881 has finished. USD/CAD's retest and success in taking out the 4 hours 55 EMA argues that the short term trend fall from 1.0819 has completed too. So after all, the greenback is in favor to strength further, supported by fall in oil prices. The questionable pairs are USD/JPY and USD/CHF as risk aversion could be a larger force driving the markets for the moment. Yen crosses will likely continue it's fall and test the low set in Sep in near term.

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