The revelation that a unit of French bank BNP Paribas temporarily suspended three of its funds injected new fear into the markets, driving global stock sharply lower and casting a fresh chill across credit markets. The market fallout from BNP has reignited market speculation that the Fed will move to cut rates sooner, rather than later.
U.S. stocks opened sharply lower and European stock markets are all down. A flight-to-quality move into U.S. Treasurys this morning is pushing yields lower. The 10-year is at 4.76%, after reaching 4.86% yesterday. Overnight the Libor interbank lending rate snapped up sharply, spooking traders on both sides of the Atlantic.
The yen rallied against the dollar and euro, meanwhile, as investors trimmed exposure to carry trades due to credit market worries.
BNP halted withdrawals from three investment funds becuase it couldn't fairly value their holdings. The funds have about $2.7 billion in assets. BNP blames problems from the U.S. subprime mortgage market. In a statement, it said "the complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating." The problem clearly took the bank by surprise. Just a week ago, the bank's CEO told CNBC Europe that all was fine.
"So far we're continuing to provide liquidity and for us this is not a significant problem at this stage," said BNP's Baudoin Prot to CNBC on August 1.
ECB to the Rescue
The European Central Bank, meanwhile, said it is conducting an operation today to add liquidity at 4% as short term lending constricted in European money markets and the demand for cash drove rates higher. The bank said there are tensions in the euro money market and it "is closely monitoring the situation to assure orderly conditions in the euro money market."
"Now you need to ask the question, does Fed Chairman Bernanke need to step up," says CNBC senior economic correspondent Steve Liesman. The Fed, meanwhile, added $24 billion in temporary reserves to the banking system overnight and traders began betting in the Fed funds futures market that the Fed would cut rates at its September meeting.
Meanwhile, as reported by CNBC's David Faber yesterday, there's worry that some of Wall Street's quant funds have run into trouble of their own. Quant fund trading is driven by complex computer programs. The Wall Street Journal reports today that Goldman Sachs quant fund, Global Alpha is down about 16%.
One of the doors on Wall Street that had been closed cracked open briefly yesterday, allowing a few blue chip companies to issue new debt. At the same time, some takeover financing became more palatable to Wall Street.
But clearly with today's action, that does not mean it's back to business.
"These deals have to come to the market," says CNBC's Rick Santelli. (By the way, you might have noticed he's on vacation.) "I think on one hand, it's an issue that's going to crop up but all the paper that moved is sound paper."
As far as the market goes, "I think it's going to be good news, bad news, good news bad news. This problem we have is going to keep reverberating for awhile," said Santelli.
It was another rocking day in the stock market yesterday. The Dow finished up 153, or 1.1% to 13,657. Over the last three sessions, gains for the Dow total 475 points or 3.6%, taking it 342 points away from its all time high. The Nasdaq jumped 51 points or 2% and S&P 500 gained 20 points or 1.4%.
The day was not without its rollercoaster ride. After being up sharply much of the day, the Dow wilted in the afternoon and even briefly turned negative as rumors flew that Goldman Sachs would make an announcement after the close and that it was liquidating its Global Alpha fund. We learned Goldman Sachs was knocking those rumors and CNBC anchors Dylan Ratigan and Maria Bartiromo quickly reported the denial just before the close. The Dow regained about 110 points in wild trading.
The health of housing and credit markets is clearly top of mind for investors these days. All day today CNBC will have special coverage - "CNBC Survival Guide: Real Estate Now" - and will look at the health of real estate, the mortgage market and industries related to housing.
CNBC's Hampton Pearson will continue coverage of the proposal floated this week to allow Fannie Mae and Freddie Mac to expand their mortgage portfolios. Sen. Christopher Dodd, D-Conn., who chairs the Senate Banking Committee threw his support behind the plan to raise the caps on the amount of mortgages and related securities Fannie and Freddie can hold. That proposal has cheered investors in stocks of mortgage companies as it could lighten the pressure in the secondary mortgage market.
Rep. Barney Frank, who heads the House Financial Services committee, said he favors removing the current cap as well. But President Bush rained on the party yesterday (and took some gains out of the stock market) when he said that regulation of Fannie and Freddie should be sorted out before they are allowed to expand their portfolios.
In other housing news, big insurer AIG said late yesterday it is comfortable with its exposure to the U.S. residential mortgage market both operationally and in its investments. The company reported second quarter earnings of $4.28 billion or $1.64 per share, better than analysts expected. AIG today said it sees rising delinquencies in the mortgage category above sub prime.
CNBC's Matt Nesto will take a look today at the wild action in builders, mortgage lenders and other housing related stocks this week. Some home builders scored big gains and beaten down mortgage lenders also rose.
Countrywide Financial was one of those stocks moving higher yesterday after its stock was pummeled last week amid rumors it was having trouble in the commercial paper market. Countrywide denied those rumors. Interesting to note that Countrywide Financial CEO Angelo Mozilo filed yesterday for the sale of 92,000 shares of Countrywide. Mozillo exercised options at $14.69 and sold at $28.74. If he had sold in February, he would have gotten more than $44 for those shares.
You may recall we looked yesterday at the U.K. Telegraph's report of comments made by two low-level Chinese officials about the ability of China to punish the U.S. by bailing big time on dollar assets if the United States uses trade sanctions to force it to revalue its currency. The article says this not so veiled threat is described as the "nuclear option" in state media.
Those words raised the hackles of Sen. Chuck Grassley, who fired off a letter to the Chinese Ambassador asking the Chinese government to clarify whether these comments are official government policy. Grassley says in his letter this type of counterproductive comments "harden people's views that China is purposely manipulating its currency to gain economic advantage."
Bartiromo also discussed the idea of China dumping U.S. Treasury securities with Treasury Secretary Hank Paulson, in an exclusive interview yesterday.
"Paulson also said the idea of China unloading its U.S. reserves is 'absurd.' Few people know more about China than Paulson and I believe him. Sure it and many other sovereign funds will diversify and look for alternative investments that yield returns, like China buying into Blackstone or Singapore buying into Barclays, but these sovereign funds are an important part of the bull case story. They have provided an additional huge pool of liquidity," said Bartiromo.
Bartiromo said Paulson also made comments to calm the markets. "I think this market is returning to basics and fundamentals. I have been saying all along that when you look at the global economy today, we see a solid story and Paulson reiterated that," said Bartiromo, who had an exclusive interview with Paulson yesterday.
"It's what the market needed to hear. Inflation is low, unemployment is low, the global growth story is solid. Yes, housing is weak and will probably get weaker. But markets have a way of correcting themselves. That is what's happening to real estate and that is what is happening to credit and the easy money environment. This is a good thing. We all knew things were overheated. But when you go back to the fundamentals, you see how solid things are." she said.
CNBC's Melissa Lee continues her reports from China. Today, she looks at online gaming, a boom business in China. Darren Rovell reports on the battle of athletic shoe brands as they head for the Olympics next year.