Stocks surge in relief rally

Stock prices surged the most since January as signs emerged that lawmakers were inching toward a deal to increase the debt ceiling and avert a default. But it could all turn on a dime.

Stocks rallied the most in 10 months Thursday in a relief rally touched off by signs that lawmakers were moving toward an agreement to increase the debt ceiling and avoid a default.

Based on preliminary numbers, the blue chip Dow Jones industrial average gained 323.09 points, or 2.2%, to 15,126.10. The broad market S&P 500 index added 32.36 points, or nearly 2%, to 1,688.76 and the Nasdaq composite index surged 82.97 points, or 2.25%, to 3,760.75.

Dow up 300 points! Do investors really think we were that close to default yesterday, and that far away from default today? #stillshutdown

— Jeff Benjamin (@Jeff_Benjamin) October 10, 2013

“This is purely and utterly relief that something will get done in Washington today, partially related to the overnight agreement between China and the ECB to provide liquidity in case of a crisis,” said Paul Schatz, president of Heritage Capital LLC. He pegged 200 points to investor belief that the country’s debt ceiling will be raised at least for the short-term, and 100 points on news that the European Central Bank and China opened up a swap line agreement for currencies.

“If all these reports of a deal fall apart, tomorrow will be ugly. Probably open down 150 to 200 points,” Mr. Schatz said.

Call us cynical, but the 300-pt. Dow swing seems overblown. Were we really that close to default yesterday and that far away from edge 2day?

— Ed Slott and Company (@theslottreport) October 10, 2013

“There was a lot of anxiety over the debt ceiling. Today alleviated some of that,” said Russ Koesterich, chief investment strategist at BlackRock Inc.

“Whether or not we can hold these gains is another matter. There’s certainly a pathway to a deal,” Mr. Koesterich said.
“The question is are we going to be in a better place six weeks from now?” he asked. “The risk is we’re not.”

The S&P 500’s rally Thursday was the biggest since a 2.5% surge on the first trading day of the year, when lawmakers passed a bill averting spending cuts and tax increases known as the fiscal cliff. The index has advanced 0.6% since the government shutdown began Oct. 1, and has trimmed its decline to 1.9% since its record of 1,725.52 set on Sept. 18.

“You’re taking the nuclear option off the table, the fact that we’ll blow through the debt ceiling, that’s not going to happen,” Dan Veru, the chief investment officer who helps oversee $4.5 billion at Palisade Capital Management LLC, said. “This continues to put pressure on lawmakers to get a deal done because they’re seeing that just in fact talking is what markets want them to” do, he said.

You know whats really Bearish about the Dow up 300 points in a day? NOTHING

— Barry Ritholtz (@ritholtz) October 10, 2013

Investors reacted to a House Republican proposal for a short-term increase in the debt ceiling that would reduce the prospects for a U.S. default. The plan would push the lapse of U.S. borrowing authority to Nov. 22 from Oct. 17. It wouldn’t end the 10-day-old partial shutdown of the federal government.

No strings

President Barack Obama would support a short increase in the U.S. debt limit with no “partisan strings attached,” though he prefers a longer extension, Jay Carney, the White House press secretary, said Thursday.

U.S. Treasury Secretary Jacob J. Lew warned Congress that “uncertainty” over the debt limit is starting to stress financial markets and trying to time an increase to the last minute “could be very dangerous.”

A Treasury Department report on Oct. 3 said consequences would be “catastrophic” should the U.S. default, including higher interest rates, lower investment and slow growth for decades to come.

A partial federal government shutdown lasting through the end of this week would pare 0.2 percentage point from U.S. economic growth and cost as much as 0.5 point if it continues another two weeks, according to the median estimate in a Bloomberg survey of economists taken Oct 4-9.