Market Reaction to the GSE Deal

Now that the Treasury's plan to take over the government sponsored entities Fannie Mae and Freddie Mac seems to be happening, what might the stock market's overall reaction be and how might that effect the dollar? While a definite answer cannot be given we do know that the market reacted favorably back in March after the Fed solved the Bear Sterns situation, although ultimately markets collapsed again. In times like these the market looks for leadership, so certainly if PIMCO and other big financial firms make investments along with the Treasury, that would likely be taken as a net positive.

However, I have to believe that implimentation of the Treasury's plan will have a positive effect on the dollar and that the dollar's recent surge against the high-yielding currencies will continue. We have seen the dollar appreciate when stocks are up and when stocks go down, but if the stock market's reaction is positive that is likely to provide an even bigger boost.

The best way to observe this of course is by watching the price action, and we may see pairs like EUR/USD and GBP/USD open with big gaps to the downside. What also is important is how the index futures trade, so once those get going watching the movement there will be critical.

Planned Bailouts Just the beginning?

Fannie Mae and Freddie Mac saw modest gains in trading this afternoon only to see those gains decimated after news of the planned federal bailout reached Wall Street. The U.S. Government is planning on putting the troubled firms into a legal state known as a conservatorship. The value of the company’s stock would become diluted but not totally wiped out while their other securities, namely the company debt and preferred shares would be protected by the government. The government would then set about with reorganizing the two companies, including making changes to senior management.

This essentially will allow Fannie and Freddie to continue serving on their loans while having the security of the federal government backing them. While it is unknown exactly how many tens of billions of dollars it will take to stabilize them, the government plans to minimize the cost to tax payers by making quarterly injections of cash instead of making one large injection which may ultimately not be enough.

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