Wall Street prepares for lift off on the opening amid calmer credit markets, higher world stock markets and some merger news. European stock markets are comfortably higher, and Asia closed higher though Japan stocks were flat on the rising yen.
The dramatic flight into the short end of the Treasury market resulted in some pretty dramatic moves in yields this week. First a roller-coaster move lower, then a reversal. Take a look at the two-year Treasury. Yesterday at this time, it was dipping to 3.99%. Currently it's 3% higher.
"The only thing traders are watching is the yield on the short-term Treasuries. The VIX (widely watched volatility index) has been moving down dramatically for three days. There's a noticeable decline in fear. There's no selling into rallies in brokers," said CNBC's Bob Pisani yesterday afternoon.
Traders took some comfort in comments from Sen. Christopher Dodd, D-Conn. after his meeting with Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke.
"He reinforced what they wanted to believe -- that Bernanke is out watching out for them. Even something like (Dodd's comment) that 'Bernanke will use all the tools at his disposal" was reassuring," Pisani said. "The important thing is the psychological leap has been made (by the Fed's action last week), and traders think he'll do what he has to do. The psychological belief is that he is on their side."
"If I were Hank or Ben right now, I'd look at the markets and be impressed ... a very contained range in the equities," said CNBC's Rick Santeilli. "The interest rate complex showed full flight to quality early (yesterday) and then was kind of unchanged in T-bills. We know the credit issues are going to live on and on and on, and if the markets can live with that, like someone nursing an ailing relative back to health, then they can get through the current uncertainty."
Rate Cut Coming
The debate on the street is increasingly when the Fed will cut its target Fed funds rate, not when. Today, CNBC's senior economic correspondent Steve Liesman will look today at why it's likely the Fed will cut the current 5.25% rate at its September 18 meeting. "I think it's sooner rather than later" for the rate cut, Liesman said.
"There will now be the permanent increase in credit spreads. There's a permanent tightening of financial conditions," Liesman said. "We will no longer believe credit is a commodity."
Deal activity perked up today, heartening to traders who worry the merger boom has ended permanently. The Wall Street Journal reports that TD Ameritrade and ETrade are holding merger talks. Nymex, meanwhile, says it held preliminary discussions about a potential merger. Reuters reports that Dubai World will acquire a 9.5% stake in MGM Mirage and 50% of the casino's CityCenter development project for $5 billion.
A big fear for the credit markets has been the health of the $1.2 trillion commercial paper market, which is essentially used by companies to take out short-term corporate IOUs. Traders say there is some stabilizing in the market. "It's a better tone, but we're no way out of the woods yet," said Liesman.
CNBC's Maria Bartiromo asked Barclay' s president Robert Diamond about commercial paper on Closing Bell yesterday.
"Unlike other situations we've seen in 2001, 2002, 1998, the fundamental economy around the world" is very strong, as are corporate balance sheets. "This is a markets liquidity issue," he said.
Traders today have been saying there seems to be stability in the commercial paper arena. "We're looking at the burden of proof the wrong way. Commercial paper doesn't need to look good. Commercial paper needs to look stable. In a world of uncertainty, the markets are going to start doing business as usual. The risk adjustment mentality is going to be around for awhile and there's no force on the planet, including the Fed, that's going to change that quickly," said Santelli.
Taking a Toll
Home builder Toll Brothers' third quarter net slumped 85% to $26.5 million. The company said its seeing a higher rate of cancellations than ever before in its 21 years history and it warns that mortgage market liquidity issues and higher borrowing costs may "impede some customers from closing, while others may find it more difficult to sell their existing homes." But the builder also sees that the type of buyers it generally deals with have attractive credit profiles and should be able to get mortgages.
Oil is firmer this morning ahead of inventory data after a drop of 2.3% yesterday. "What I'm hearing from traders is that funds were liquidating their energy holdings," said CNBC's Rebecca Jarvis from the NYMEX. Oil settled at $69.47, and is just above that this morning.
"By falling below that $70.10 (per barrel) level, the market set a new level of overhead resistance, and the support is now at $68.60, she said.
Natural gas fell a steep 3.7% to $5.817 per million BTUs. "Natural gas more than any other futures contract had the hurricane premium built into it," Jarvis said.
Jarvis reports on another story that escaped us yesterday. Actress Cameron Diaz was at the NYMEX yesterday, studying to be a trader for an upcoming film "She walked onto the platform and rang the closing bell. There was some whistling. There was some cheering too."