The dollar rose against the yen and the euro on hopes the U.S. plan, detailed on Monday by U.S. Treasury Secretary Timothy Geithner, will revive the world’s largest economy.

This helped the dollar to halt last week’s slide, which was sparked by the Fed’s plan to buy government debt as part of a move to expand its balance sheet.

The MSCI World index, a gauge of global stocks performance, rose 0.5 percent after rising to its highest level since mid-February. The index, which fell to a six-year low on March 9, has risen in 10 of the last 11 sessions.

The FTSEurofirst 300 index of top European shares rose for a fourth consecutive session and was up 0.4 percent after rising as much as 1.5 percent earlier. It pared gains as investors took profits from recent moves that pushed the index up 15 percent from its 12-year low hit on March 9.

“If this positive momentum can be sustained, and there are further signs that the credit markets are loosening, we could see money that had previously sat on the sidelines re-entering the markets,” said Chris Hossain, senior sales manager at ODL Securities.

Appetite for riskier assets such as equities grew after the U.S. government on Monday offered a raft of incentives for private investors to help rid banks of up to $1 trillion in toxic assets that plunged the world economy into crisis.

Latest euro zone economic data was also encouraging. Key gauges of services and manufacturing activity suggested the economic contraction gripping the euro zone eased a little in March, against expectations, but firms continued to slash jobs and prices.

Sentiment also improved after Monday’s data showed a surprise rise in U.S. home sales, reviving hopes the battered housing market could be on a recovery path.

But analysts said they wanted to see more evidence before declaring the market has seen its trough. The FTSEurofirst is still down 11 percent this year after plunging 45 percent in 2008 on a crisis that began with U.S. mortgage defaults in 2007 and has pushed much of the world into a deep recession.

“It is way too early to call the end of the bear market. The financials have still recouped only a little part of the big losses,” said Philippe Gijsels, strategist at Fortis.

“The Geithner plan is certainly a step in the right direction and should eventually help, but it is not a miracle either. We will have to see whether the plan will actually work,” he said.

Analysts said the market could witness more bad news in the coming months.

“Everyone seems very upbeat and people are calling the end of the bear market, but we haven’t reached the bottom of the economic cycle — there’s at least three months of painful stuff to come,” said David Buik, senior strategist at BGC Partners.

EURO UNDER PRESSURE

In the currency market, the euro was under pressure as euro zone policymakers suggested that interest rates in the region could fall further.

“The initial reaction to Fed quantitative easing was to sell the dollar, but after the Geithner plan people started thinking that the U.S. is perhaps leading the global economy out of all this,” State Street currency strategist Lee Ferridge said.

“This U.S. recovery story benefits the dollar against both the yen and the euro,” he said.

The dollar index, a gauge of its performance against a basket of major currencies, was up 0.3 percent at 83.693.

Euro zone government bond yields marked a five-day high , while U.S. Treasuries slipped as stocks extended their rally and dealers braced for this week’s slew of nearly $100 billion of U.S. bond supply, which opens with $40 billion of two-year T-Notes on Tuesday.

European credit derivative indexes rallied for a second day, after stocks rose sharply. The investment-grade Markit iTraxx Europe index was at 154 basis points, according to data from Markit, 9 basis points tighter versus late Monday.

In commodity markets, gold slipped on the firmer dollar as the metal became costlier for holders of other currencies. But crude oil prices retreated as investors took profits after a 3 percent rally in the previous session.

March 24 (Reuters)

“The growing reality is that this is not just a slowdown, but a true recession,” Joel Naroff, president and chief economist of Naroff Economic Advisors told Money Morning Friday. “Europe and Asia can no longer deny U.S. problems are also hitting there.”

Friday was the 79th anniversary of 1929’s “Black Thursday,” when U.S. stocks were decimated at the start of the Great Depression. And while U.S. markets weren’t quite as hard hit on that date in 2008 as they were in 1929, the overall global effect was chilling.

This October is on track to be the worst since the crash of 1987.

The MSCI World Index has been decimated as each of the 48 developed nations tracked by MSCI Inc. (MXB) have marked a decline so far this year, with 22 of those nations down more than 50%, Bloomberg News reported.

Emerging markets, the global superstars of growth in 2007, are also slowing. Of the “BRIC” nations of Brazil, Russia, India and China, Russia has been hit the hardest. Russia’s Micex Index is down more than 73% year-to-date. China’s stock market is down more than 60% from its peak.

All three major U.S. indices have racked up steep losses for the month of October and are deep in bear market territory for the year.

• The blue-chip Dow Jones Industrial Average Index is down 22.8% for the month and 36.8% year-to-date.
• The tech-laden Nasdaq Composite Index is down 25.8% for the month and 41.5% for the year.
• And the broader Standard & Poor’s 500 Index has dropped 24.7% in October and is down 40.3% so far this year.

The month has seen unprecedented government intervention into the private markets, including coordinated interest rate cuts and widespread bank recapitalization measures, but global stock indices continue to fall. The U.S. Federal Reserve is slated to begin a two-day meeting tomorrow (Tuesday).

“The outlook for the market really depends upon what type of action the Fed may take,” Doug Roberts, chief investment strategist for Channel Capital Research in Shrewsbury, New Jersey, told Reuters. “I wouldn’t rule out the possibility of something on a coordinated basis globally as well.”

Widening Swath of Recessions

Friday’s steep sell-off was sparked in part by the British Office for National Statistics’ announcement that, after a flat second quarter, U.K. gross domestic product (GDP) contracted 0.5% in the three months ended Sept. 30. It was a sharper decline than expected, as median economists’ estimates projected a 0.2% decline, according to Reuters.

Howard Archer, economist at Global Insight Inc., said the reading indicates that the United Kingdom is in a recession.

“The depth of the decline means that we are there to all intents and purposes. Indeed, there can be no doubt that further marked GDP contraction will occur in the fourth quarter as consumers retrench in the face of major headwinds and investment is pared back sharply,” Archer told The Financial Times.

Other European nations have already succumbed to recession, while still more are teetering on the brink of economic contraction. Germany, the EU’s largest economy, is expected to see a 0.2% contraction in gross domestic product (GDP) for the third quarter after a 0.5% contraction in the second quarter. And the nation of Iceland is dangerously close to bankruptcy.

In Asia, Japan – the world’s second largest economy – is also dangerously close to recession. Japan’s GDP contracted 2.4% in the three months ended June 30 after expanding 3.2% in the first quarter.

Worse, the United States could be next.

U.S. Economic Peril

U.S. GDP for the second quarter clocked in at a surprisingly strong 2.8%. But the advance estimate for third quarter U.S. GDP is slated for release this coming Thursday, and according to Naroff, the world markets could very well be in for another shock.

“U.S. GDP contracted significantly in the third quarter,” Naroff said. He predicts GDP may have fallen as much as 2.5% – 3.0%. “Such a sharp slowdown is not expected.”

Global investors might not expect such a sharp decline, but a dire stream of economic indicators has been flooding in for months and they haven’t painted a pretty picture.

“We expect our number next week not to be a good one, and the next quarter could probably be tough as well,” White House Press Secretary Dana Perino said at a White House briefing on Thursday, referring to the upcoming GDP announcement, Bloomberg News reported.

“The president knows that we’re in for a rough ride,” Perino said.

According to Bloomberg data, median economist expectations predict a 0.5% contraction in U.S. GDP for the third quarter.

U.S. unemployment continues to rise and a slowdown in consumer spending, which is responsible for two-thirds of GDP, is bound to slowdown.

“I don’t see how the consumer can do anything but retrench,” Robert McTeer, former president of the Fed Bank of Dallas, said in an Oct. 24 Bloomberg Television interview. “If they all do it at the same time, it will really tank the economy.”

Analysts from Citigroup Inc. (C) predict the United States could see an entire year of contraction before the economy gets back on track, shrinking throughout the first half of 2009.

“We are now expecting one of the sharpest recessions in the post-war period,” Citigroup’s Geoffrey Dennis and Jason Press wrote in a report to clients on Oct. 21.

Dennis and Press also predicted that U.S. unemployment could reach as high as 8.5%.

Source: Recession Fears Hit Home as World Markets Plummet and U.S. Economy Contracts

The losses among banks, insurers and money managers may spark the next round of writedowns on CDOs after $660 billion in subprime-related losses. They may force lenders to post more reserves against losses after governments worldwide announced $3 trillion in financial-industry rescue packages since last month, according to Barclays Capital.

– Meanwhile, Reuters reports that U.S. banks will need more $700 billion in government cash injections to stay afloat because “banks cannot predict how many of their loans will sour because they do not know how much the economy will shrink, and forecasts of their future losses would only spook investors.”

– The numbers are certainly worrying:

By the numbers, the outlook for banks is troubling. U.S. commercial banks had about $1 trillion of capital as of the end of the second quarter.

That may sound like a lot, but Alpert estimates that banks globally could have a total of $1.25 trillion to $1.5 trillion of writedowns and losses from mortgages, of which perhaps $600 billion have already been recorded.

– Earnings season is upon us. Investors are reacting to the prospect of corporate losses. This from MarketWatch:

U.S. stock futures pointed to a second straight drop on Wednesday on concerns for earnings in a rocky economy, though Apple looked set to buck the trend after the consumer electronics giant was able to sell far more iPhones than expected.

S&P 500 futures fell 20.1 points to 939.20 and Dow industrial futures tumbled 166 points. Futures on the tech-concentrated Nasdaq 100 fell a more modest 15.5 points to 1,277.00.

– Global stock indexes also fell. This from Bloomberg:

The MSCI World Index lost 2.9 percent to 944.07 at 12:02 p.m. in London. The index has lost 40 percent this year and oil has tumbled more than 50 percent from its peak in July as concern deepened government bailouts to save the global banking system won’t avert a recession.

– In the currency markets, the British pound hit a five-year low against the dollar. The euro plumbed a 20-month low against the buck.

– Crude oil prices fell below $70 a barrel on growing fears of a global economic slowdown. OPEC’s scheduled meeting on Friday to discuss output cuts has so far failed to stem oil’s slide.

– A lot of investors are calling a bottom — at least a tentative bottom — in stocks.

– Addison Wiggan and Ian Mathias in The 5 Min. Forecast note that Jeremy Grantham, self-proclaimed “perma-bear” is turning bullish.

Grantham says the time has come for “hesitant and careful buying” of equities. Grantham, who also correctly called a global bubble among all asset classes last year, told his $120 billion worth of clients that this is the quarter to start buying.

“On Oct. 10, we can say that, with the S&P at 900, stocks are cheap in the U.S. and cheaper still overseas. We will, therefore, be steady buyers at these prices. Not necessarily rapid buyers — in fact, probably not — but steady buyers…

“History warns, though, that new lows are more likely than not.

“Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look OK for now, but the pound does not. Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!

“Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows. As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower.”

Earnings from Merrill Lynch, Motorola and Pfizer all point to poor results and the markets are heading lower in the United States and Europe. No surprise for this bear…

Stocks can still muster a significant bear-market rally. The S&P 500 Index and the MSCI World Index have logged almost six consecutive monthly losses. In previous bear markets, including the 2000 to 2002 period, equities did manage to post some big rallies. Of course, these intermediate or short-term advances were just opportunities to sell stocks as markets eventually broke down to newer lows.

What’s amazing about the last bear market is that stocks continued to plunge even as the Federal Reserve aggressively cut lending rates. Turn the calendar ahead six years and we’re pretty much in the same pickle.

The bulls point to the Fed as our stock-market savior. I’m not so sure. Yes, it’s hard or even futile to “Fight the Fed” when the central bank is printing like mad and desperately trying to reflate the money-supply. But investors tend to forget that despite the Fed’s best efforts starting in January 2001, Greenspan and his boys unsuccessfully halted a massive slide in stock values. From January 2001 until December 2002, the Fed cut rates from 5.50% to 1.25%, yet the S&P 500 Index still plunged a cumulative 36%.

Since the Bernanke Fed began cutting rates last September, the S&P 500 Index has declined a cumulative 10% – not exactly a successful rescue.

I still think this market will form a bottom sometime in the fourth quarter – not before. But even then, I don’t expect a bull market to return because the contraction of credit has fractured the economy, corporate earnings and the consumer. It’s hard to be bullish on the market for an extended period especially when oil is trading north of US$100 per barrel.

Last summer, I predicted stocks would still finish higher 12 months later. I was too optimistic. The depth of this crisis is enormous and although we’re probably two-thirds of the way through the worst of this debacle, its implications for the economy will linger for many years.

Bank stocks will ultimately lead the next rally because they represent about 35% of total global stock-market capitalization. It’s pretty likely that as stocks form a bottom later this year the market will enjoy a blistering 12-month gain.

Don’t mistake a rally for a new bull market. No matter what happens in the short-term, most stocks will be poor investments over the next several years as inflation, deflation and a long-term contraction in bank credit slow the world’s largest economy to pre-1995 levels.

ERIC ROSEMAN, Investment Director

P.S. In the upcoming May edition of The Sovereign Individual, I’ll give you an entire “anti-crisis portfolio” packed with seven different ways to protect your holdings from the Fed’s latest “rescue.” Click here to sign up for a risk-free subscription so you don’t miss out.