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CNBC's Domm: Today's Agenda in the Markets

Stoked by positive developments on the credit and mortgage front, stocks are building on yesterday's gains and look ready to spring higher on the open.

European markets are higher, and Asian markets overnight scored sizeable gains. Japan's Nikkei climbed 2.6%, South Korea rose 2.3%, and Hong Kong was up 2.8%. The Bank of Japan left interest rates unchanged as expected and the yen was significantly weaker.

Bank of America's $2 billion equity investment in Countrywide injected a big jolt of confidence into the market and is adding some calm to investor jitters over the mortgage market. Countrywide stock soared more than 20% in late trading after it revealed Bank of America would make the investment. CNBC's Maria Bartiromo has an exclusive interview with Countrywide CEO Angelo Mozilo at 11 am New York time this morning. This is the first time we'll hear from Mozilo since it became clear the mortgage mess was seriously damaging his company.

Bank of America seems to have been quite familiar with Countrywide's business and was reported to have kicked the tires earlier this year. In fact, CNBC's Dylan Ratigan reported way back in January that there were several buyers eyeing Countrywide. At the time, Countrywide was trading above $40 per share. Yesterday, it was around $21. Stocks of other mortgage companies were moving higher this morning, including Thornburg.

Other positive news from the credit markets yesterday has helped the stock market's tone. For one, Rio Tinto was able to raise $40 billion from banks to fund its acquisition of Canadian aluminum company, Alcan. Also, there was some real action in the corporate credit market with several big debt offerings being marketed or priced. Merrill Lynch, American Express, and Deere were among the issuers.

Mortgage Mess

Lehman yesterday was the latest to bail on the subprime mortgage business. The firm said it is laying off 1,200 people, or 4.2% of its work force. The Wall Street Journal this morning tallies that in the last 10 days, more than 12,000 workers have lost their jobs at mortgage lenders.

Fed and the markets

The chorus of market watchers weighing in on the Fed's next move continues. Today Wayne Angell, a former Fed board member, called on the Fed to lower the fed funds rate in a Wall Street Journal editorial that is getting attention from traders. Angell made the same comments on CNBC's "Kudlow and Co." Aug. 17.

"The Fed's got your back. The impression's out there," says Fast Money's Jeff Macke. That certainly is the feeling in the stock market which rode higher yesterday in part on the belief a rate cut is coming.

Encouraged by the Fed, four big U.S. banks yesterday said they borrowed a total of $2 billion from the discount window. The banks Citigroup, Bank of America, Wachovia and J.P. Morgan said they were each borrowing $500 million. Macke, on "Fast Money" last night, joked that Treasury Secretary Hank Paulson was beating the banks with a stick, getting them to go to the window as a show of confidence. The Fed at 4:30 pm New York time will release information on how much the banks have been borrowing at the discount rate.

The Dow yesterday rose 145 points or 1.1% to 13,236. Nasdaq was up 31, or 1.2%, and the S&P 500 was up 16.95 or 1.2%.

A much more stable Treasury market continued to sell off yesterday, reversing the beginning of the week's panicky flight-to-quality buying spree. The 10-year fell 8/32, pushing its yield up to 4.62%. The yield was at 4.69% today. The two-year erased 7/32, giving it a yield of 4.129%. This morning, the two-year was at 4.27%.

CNBC's Rick Santelli wrote to us yesterday and points out there's a certain irony in the bond market's move because it makes a Fed rate cut less likely.

"The notion of a TARGET rate cut sooner rather than later was REVISED by the markets today … if one assumes the FED and TREASURY have/are active behind the scenes studying/monitoring credit conditions, their actions thus far speak volumes regarding the lowering of the target rate as being more economically strategic versus medicinal in the short term," he wrote.

That move in the bond market is signalling investors are less fearful, says Michael Cheah of AIG SunAmerica Asset Management.

"On a very short term basis, we are seeing some second guessing in the sense that maybe the fear has been pushed too far, too quickly," says Cheah, who manages $2 billion in bonds. "There's been some stepping in to risk-taking mode again. The credit default swap is no longer widening. This is in many ways encouraged by the more robust stock market."

Cheah said the stock market seems to be benefiting from the speculation that the Fed will cut its target rate, but he believes the Fed is doing everything in its power to avoid that. "I've been in the market for 20-odd years, and I have never seen the Federal Reserve that is doing so much in terms of pulling out their policy tools … That tells me the Federal Reserve is trying to defend the current Fed funds rate. They are very reluctant to cut the Fed funds rate."

Cheah compared the Fed to an emergency response team at the scene of an accident in the way it has previously jumped in to ease market pain with rate cuts. But he says the Fed's ambulance was dragging an ice cream truck to the accident. "You had the ambulance rescuing those who were hurt and the ice cream truck was handing out ice cream to the bystanders. Bernanke is trying hard not to bring out the ice cream truck," he said.

Oil is firmer this morning but yesterday continued its slide, losing 31 cents to $69.26.

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC's Senior Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.