Stock traders will be looking over their shoulders at the credit markets as a furious flight to quality into Treasuries keeps the pressure on stocks prices. For now, stock futures are higher and look set for a firmer opening.
Rumors were rampant this morning that the Fed will cut rates, even before its September meeting.
"There'll be no shortage of rumors for the Fed to be more aggressive," said CNBC's Rick Santelli, adding that much of the rumor mongering is coming from the hedge fund community.
Stock futures have been fluctuating this morning. The carry through from Friday's Fed-inspired rally faded fast yesterday and the flood of money into Treasuries yesterday spurred speculation the Fed will have to cut its federal fund rate sooner, rather than later. The Dow rose 42 points yesterday to 13,121 but not without a volatile drop of 96 points and an upswing to a gain of 102 points. Nasdaq finished up 3 points, and S&P 500 was off 0.39 points.
"You see people buying protection in the Treasuries...My main concern is as long as that trend's higher, we're going lower," said a stock trader on one Wall Street desk.
European markets are trading higher, and Asian stock markets closed higher. China's Shanghai index hit another new high overnight. China today raised interest rates for the fourth time since March, in an effort to cool its fast growing economy.
Crude oil continues to weaken this morning after falling $0.86 per barrel to $71.12. Oil is down 9.1% from the high of $78.21 it hit on July 31 but it is still up 16.5% for the year.
An extraordinary flight-to-quality pushed the yield on short-term Treasuries sharply lower yesterday and the trend continues this morning.
Traders said the buying spree in short-term Treasuries came at the expense of the commercial paper market, basically the market for short term corporate IOUs. The three-month T-bill yesterday had its steepest one day decline at one point in the day since January, 1989. The 3-month finished at 3.04%, down more than 70 basis points.
The two-year Treasury yield slid under 4% this morning. Yesterday the two-year rose 4/32 points, bringing its yield to 4.092%. The 10-year rose 10/32, lowering its yield to 4.634%. This morning, the 10-year yield was at 4.60%.
"All spreads on Treasuries vs. every other short rate are widening," said Santelli. "Treasuries vs. euro dollars are the widest I've seen it since 87," Santelli said during the afternoon yesterday.
The one-month ended yesterday at 2.347%, down from about 2.95% the day earlier. The drop in the one month yield is the third largest since July 31, 2001. The largest decline ever took place just last Thursday.
One theory is that money market mutual funds, the safe haven investment in many portfolios and 401ks were among those purchasing more short-term Treasuries and veering away from other, higher risk investments. "There is maybe a crowding out here. It's being fed by the expectation that that Fed is cutting rates in September," said one credit market pro.
"History dictates that when short-term interest rates behave in the aggressive way they have in the last several days and last several weeks, it portends a landscape of risk aversion, normally associated with large sell offs in equities," said CNBC's Santelli.
What to Watch
Treasury Secretary Hank Paulson speaks in an exclusive interview with CNBC's senior economic correspondent Steve Liesman at 9 a.m. New York time on Squawk on the Street. We hope to hear more from Paulson on the markets and economy.
Important also today is the meeting Sen. Chris Dodd, D-Conn. has later this morning with Fed Chairman Ben Bernanke and Paulson to discuss volatility in the markets and the economic implications. Dodd broke the news of the meeting with Bernanke in an interview with CNBC's politics guru John Harwood yesterday.
"Chris Dodd is running for president and hasn't gotten a lot of attention," said Harwood. Harwood said it isn't unprecedented for a Fed chairman to have a meeting with a Congressman.
"It's sort of somewhat more common to bring them up to a public hearing. It's less often that it's a chairman in a one on one behind closed doors," said Harwood. Dodd is chairman of the Senate Committee on Banking, Housing, and Urban Affairs.
Harwood said he expects the visit to be respectful but not much action will come of it. "He's likely to nod his head and not do very much," Harwood said of Bernanke.
"Chris Dodd, I think, had an impact on the market," said CNBC's Bob Pisani. "Everybody thinks it can't hurt." Pisani said there was a let up in the rally in T-bills after Dodd told Harwood about his meeting with Bernanke. Stocks rallied about an hour later.
"Once he did that, the rally in the three- and six- month Treasuries kind of stopped. The bleeding in financials kind of stopped. An hour later we rallied," said Pisani. Other than the financial area, Pisani said the market was calmer. "It was the first real August summer Monday we've seen," he said.
CNBC's Jane Wells reported on the loss of jobs in the mortgage lending industry yesterday, starting with Countrywide's layoffs. By late afternoon, there was another casualty. Credit card company Capital One Financial Corp said will close its GreenPoint Mortgage unit, eliminating 1,900 jobs.
"It's a sign that liquidity is still not normal in the mortgage market," said Pisani.
The Wall Street Journal, meanwhile, reports that Warren Buffett's Berkshire Hathaway could be a buyer of Countrywide assets. The Journal asks in its headline, "After the tumult, is it Buffett time?" Remember Buffett told CNBC's Becky Quick last week that there are buying opportunities in unsettled markets.
Hurricane Dean was downgraded to a category three from category five as it pummels Mexico.