Wall Street is bracing for a sharply lower open as fears of a global liquidity crisis pound stock markets worldwide. Central banks around the globe stepped in to inject funds into the banking system and pump confidence back into markets, wary of the continued ripple effect of the U.S. subprime mortgage fallout.
In Asia, Tokyo's Nikkei lost 2.4%, Taiwan lost 3% and Korea lost 4%. The selling continued across Europe this morning. London's FTSE was off 3%, the German Dax was off more than 1.5% and France was off 2.7% European Asian stocks suffered.
The European Central Bank poured funds into the system for a second day, and the Fed followed suit, adding $19 billion in three-day repurchase agreements.
Fed funds, targeted at 5.25% by the Fed, were offered at 6% this morning, but retreated shortly after the injection of money into the market. Widely watched Libor rose to 5.956% today from 5.864%.
CNBC's Scott Wapner, readying for the day at the NYSE, says there's a new mood on Wall Street.
"Investors have suddenly come to the bleak realization that the subprime fallout is not a U.S. problem, but a global one," Wapner said. "There's a real belief that we haven't seen the worst of it, and that's only adding to the jitters."
The yen continues to rise against the dollar and euro as investors unwind yen financed carry trades.
"The stock market is a victim of what's happening. It's not the major player. You have a market that is trading under 15 times earnings. You have balance sheets that are full of cash. They may eventually have to adjust to a lower growth environment," said CNBC senior economic correspondent Steve Liesman.
Deutsche Bank's DWS ABS Fund is reported to have fallen by a third to $2.9 billion at the end of July. The bank said the fund held no subprime debt. Yesterday, it was French BNP Paribas' revelation that it was freezing three of its funds that shook markets. Rumors of hedge-fund losses continue to swirl on Wall Street.
CNBC's Rick Santelli says it's not surprising to hear more pain from Europe because banks there loaded up on derivatives. "European banks love derivatives like they love pastries. They are interested in financial engineering and technology and they always consider themselves on the cutting edge of that," says Santelli.
Santelli also recently told us "the U.S. imports global growth and exports bad credit." That sure rings true.
"I don't think everybody gets lumped together in the loss column, You're not going to see things grinding to a halt. You're going to see the world returning to normal...The yield curve will get steeper, helping banks, adjustable rates of old paper will still benefit from flight to quality, and there's still plenty of liquidity. But it's just that the water level dropped form eight feet to four feet. It's going to get to where it's supposed to be and it's going to hurt," Santelli said.
Wall Street Scares Itself
"Call it fear of hedge funds by the hedge funds," says CNBC's David Faber. Faber has been reporting that quant, or statistical arbitrage funds, have been suffering significant losses in recent days and are taking down leverage across the board. "That unwinding is having an effect on any number of stocks, while fears from other hedge funds about the unwinding, are forcing them to de-risk," he said.
Quantitative funds use "black box" computer strategies to drive their trading. Faber explained they use models that count on historical relationships between different securities and reap benefits from the inefficiencies. The systems "went out of whack," he said.
The Securities and Exchange Commission is combing the books of Wall Street firms for hidden subprime loan losses, says the Wall Street Journal. The SEC is examining whether the brokers and investment banks are calculating the value of mortgage assets in a consistent way.
Countrywide Financial, the biggest U.S. mortgage lender, said last night it faces "unprecedented disruptions" that could hurt profits. Countrywide said while it plans to retain more loans until investor demand improves, it said a prolonged period of poor conditions "could have an adverse impact on our future earnings and financial conditions." Countrywide stock was down about 17% in pre-market trading.
Remember yesterday, we were looking at recent stock sales by CEO Angelo Mozillo.
Fannie to the Rescue?
CNBC has been reporting that Fannie Mae wants regulators to lift the cap on mortgage holdings so it can buy more home loans. CEO Daniel Mudd told CNBC's Hampton Pearson yesterday that Fannie is ready to invest now and would be helping homeowners in danger of losing their homes. The Office of Federal Housing Enterprise Oversight has ordered Fannie and Freddie Mac to cap their portfolio growth. Some legislators favor Fannie's proposal, but President Bush has said that he believes the two government sponsored agencies need to be regulated better before they start expanding their portfolios.
Mudd talked about the housing market in general and forecast a 2% decline in housing prices this year and a 4% decline next year. "All across the housing market, there's going to be a crunch," he said.
"We don't really see a bottom until sometime toward the second half of next year," said Mudd.
CNBC's Larry Kudlow says during yesterday's market carnage, investors seemed to forget the good things going on in the economy. "Strong global boom generates huge profits for American companies. Page one of the Wall Street Journal. Let's not forget about this story. Second, the U.S. money market is flush with bank reserves. Excess reserves are huge. BNP hedge funds problem will NOT bring down the European economy, nor in my judgment will subprime credit problems bring down the U.S. economy," he said yesterday. "Today is a day that everyone is looking for the negatives but here are significant positives out there."
The Dow lost 387 points, or 2.8% yesterday. It says something that for 11 out of the last 15 sessions, the Dow has made a triple digit move. The decline was the second biggest drop of the year after February's 416 point drop, and it is the ninth biggest point decline ever. For the year, the Dow is still up 6.5%. The Nasdaq took a 56 point, or 2.2% tumble, its third biggest drop of the year. The S&P 500 was off 44 or 3%.