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Stocks on the Loose as Tightening Talk Passes

The market is taking in stride the Fed's move to a tightening bias.

When it's the devil you know, the market heads higher.

That's what it looks like the morning after the

Federal Open Market Committee

moved to a tightening bias. Fears that the Fed would do exactly that had investors watching yesterday's meeting as if they feared a rate hike.

So now the Fed's got a tightening bias. Guess what? It's not the same as a rise in rates. It's an indication that the risks are running toward inflation rather than recession. This is news?

"Even though they changed their bias, that does not necessarily mean they have to follow through," Kevin Flanagan, money market economist at

Morgan Stanley Dean Witter

, said of FOMC members. "A lot can happen that can change Fed thinking."

Bonds are doing better this morning. With hopes of a little stability in the bonds, institutions are beginning to build yen carry trades again. The carry trade takes advantage of the difference between Japanese and U.S. interest rates. Yen are borrowed at a low rate and put in U.S. Treasuries, which have a significantly higher rate of return. This helps both the Treasuries and the dollar.

The strength in bonds has stocks set to open well.

"They look a little better," said Todd Clark, head of listed trading at

Charles Schwab

. But "I'm not sure they'll get carried away."

Clark has been watching the June

S&P 500

futures contract, which has consistently bounced off the 1325 level -- most recently yesterday. "We're at the bottom of the range we've been in and it continues to hold," he said. "Basically as long as it does, the market can stay in shape."

At 9 a.m. EDT, the

S&P 500

futures were up 1, about 5 above fair value and indicating good strength at the open. The 30-year Treasury was up 9/32 to 91 6/32, dropping the yield to 5.88%.

Asian markets reacted badly to the Fed's decision to move to a tightening bias. Tokyo's


fell 250.44, or 1.5%, to 16,128.44 with exporters, dependent on U.S. sales, seeing some of the heaviest losses. Banks took some lumps, too, after the

Nihon Keizai Shimbun

reported that under the new, more rigorous rules set down by the government, the bad loans of the top 15 banks total 20.19 trillion yen (about $160 billion). That's 6.3 trillion yen more than the previous tally.

With the Hong Kong dollar pegged to the greenback, changes in the U.S. rate outlook mean a lot to the Hong Kong economy. Fears that Hong Kong interest rates will have to rise sent the

Hang Seng

down 223.96, or 1.8%, to 12,403.14.

Expectations of a better U.S. open helped European stocks overcome early negativism. In Frankfurt, the


was up 28.18 to 5183.12. In Paris, the


was up 32.01 to 4344.75.



was basically flat despite a strong performance by its second-largest component,

British Telecom


. BT's fourth-quarter results shone, with the company citing heavy Internet use as a factor.

The FTSE was down 7.1 to 6202.9. BT was up 4.5%.

Wednesday's Wake-Up Watchlist


Brian Louis

Staff Reporter

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