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Financial Shares Sell-Off Grips Markets

Fear of financial companies is again gripping world stock markets. Selling in financial shares-- banks and brokers--was a theme in the U.S. market yesterday but continued around the globe as investors worry that credit problems would show up on the books of major financial institutions. Several headlines helped stir the fear. European markets are weaker this morning, and Asian stocks closed mostly lower.

Today's big focus are on the consumer confidence report, the first since the market turmoil began, and the Fed's Aug. 7 meeting minutes. Those minutes are released at 2 p.m. New York time. Traders will be scrutinizing every word to see if they can get a read on how the Fed came to decide nine days later to cut the discount rate,

"I think it's going to be interesting to see where their heads were at, but it's not going to be enlightening," said CNBC's Rick Santelli. The Richmond Fed survey and consumer confidence are both released at 10 a.m. New York time.

Also worth watching today is the S&P Case Shiller home price index for June, which breaks down prices in 20 markets. CNBC's Diana Olick will report on the trends.

Financials Phobia
One catalyst driving weakness in the financial sector overseas was a story in the Financial Times about Barclays PLC . The story said Barclay's had "several hundred million dollars" of exposure to debt vehicles structured by its investment banking arm, but Barclays denied the report, according to Reuters.

Also, a report in the British Times newspaper says Boston-based State Street has $22 billion of exposure to asset-backed commercial paper conduits.The newspaper says according to regulatory filings, State Street has credit lines to at least six conduits, accounting for 17% of its total assets, making it the more highly exposed than its rivals. State Street was not available to immediately comment on that report.

Adding to the negative sentiment was a downgrade from Merrill Lynch this morning. It reduced Citigroup ,Lehman and Bear Stearns to neutral from buy.

On a positive note, Renaissance Technologies, meanwhile, is considering selling a stake to an investor or group of investors in the near future, the Financial Times reports. The FT says the move by the $30 billion fund may be a sign it believes the U.S. credit market crisis may be short lived and that it is an opportunity.

Fed Watching
All week long, market chatter will focus on what Fed Chairman Ben Bernanke might say Friday when he makes his first public remarks since the credit crunch really started to rock the markets. Bernanke speaks at the Kansas City Fed's Jackson Hole, Wyo. annual symposium. The topic there this year is all about real estate and mortgage lending but traders are watching Bernanke's comments closely to see if he sheds any light on the Fed's thinking on rates. CNBC's Steve Liesman will be reporting from there.

"He won't give you any room. He won't pre-empt the (Sept.18 FOMC) meeting, and the whole market's waiting for it," says Scotsman Capital Managing Director Vince Farrell, a CNBC contributor. Farrell does not believe the Fed will cut its target fed funds rate. "He can cut the discount rate again and change the statement," he said.

CNBC's Larry Kudlow says the Fed should cut rates. "It's totally counterintuitive, but lower the fed funds rate. That'll strengthen the dollar, slash the gold price, grow the economy and move to a 15,000 Dow. That came from our program tonight," Kudlow said after his show yesterday. Kudlow said his guests wee in agreement, including John Tamny of Realclearmarkets.com and "even Steve Forbes, arch enemy of easy money is for it."

Kudlow says it's a theme he will continue to follow in coming days. "Growth solves all problems, including bad credit and high inflation," he said.

Whither the Dow?
John O'Donoghue, head of trading at Cowen and Co, said the market this week should act much like yesterday's extremely light volume day, where the Dow slid up and down in a relatively tight range. The Dow finished off 56 at 13,322. The Nasdaq was off 15 at 2561, the S&P 500 lost 12 to 1466. "We may bounce around here for a bit," said O'Donoghue. He said the S&P faces resistance at 1480-1485.

O'Donoghue says the next phase for the market could be a return to stock picking. Looking beyond this week, he says buyers will start putting money to work in select stocks. "You're going to find stocks that have pretty hefty cash positions and limited credit exposure will do pretty well. Some of the names we look at in our research universe aren't doing badly. Biotech. This is kind of their season, and the techs they're doing well," he said.

But he said many investors will shun financial stocks until it is clear what the extent of the damage is from the credit crisis.

A factor that could also help drive stocks higher in the next couple months is a new wave of mergers, this time led by foreign buyers who find depressed stock prices and a cheap dollar make U.S. companies attractive. "I think there's a lot of cash outside the U.S. that's taking a predatory look at U.S. companies," he said.

One stock buyer we watch closely is Warren Buffett. Buffett is adding to his railroad holdings with new purchases of Burlington Northern for the third time this month. Buffett's reported boosting his stake with a purchsae of 10.1 million shares.

In merger news today, Medco Health Solutions agreed to buy PolyMedica Corp in a $1.5 billion deal.

Asia Rising
CNBC Asia's "Squawk Box" Co-host Amanda Drury is in the U.S. this week, filling in for "On the Money's" Melissa Francis.

Drury will be taking "On the Money" viewers on a tour of Asia this week. She follows the markets across Asia and the one that intrigues her the most is China.

While the rest of Asia's stock markets tend to follow Wall Street, China is truly decoupled. Shanghai has been hitting new highs and crossed 5100 for the first time last week and is now up near 90% year to date. "I know there's a lot of China bashing that goes on in the U.S., but everyone in Asia looks at it as the great savior. If the U.S. slows, how much can China pick up the slack?" she says. Shanghai composite closed with another gain at 5194.

We asked her more broadly about how Asian markets are coping with the U.S. subprime-related market chaos. "Everybody was initially saying it was a stateside problem. "There's no way its going to hurt us.' In the beginning, so many people said 'Ride it out. This is a correction that had to happen, and it just so happens subprime is the trigger.' As it's been unfolding and translated into general risk aversion, naturally the markets in Asia have been hurt by that. Even if they're not hurt by subprime, they are hurt by rising risk aversion," she said.

Japan's Prime Minister Abe shook up his cabinet Monday, naming a new finance minister. We asked Drury about the Japanese market. "Japan has been the laggard of Asia this year. It's down about 6% year-to-date," she said. "The story there is its economy is kind of lackluster. If it's lackluster now, how much more lackluster could it be if the U.S. economy slows down," she said. Drury says the other double whammy for Japan is that the yen gains as risk aversion rises. "If the yen gains, you will see exporting stocks drop. The psyche is that they just can't deal with the stronger yen."

Fukoshiro Nukaga was named finance minister, replacing Koji Omi. Dow Jones news wires describes him as a "veteran lawmaker in the ruling party with ministerial experience and a checkered political career." Tomorrow, Drury will tell us about the South Korean market.

Oil Spill
Oil is slipping this morning after rising 1.2% yesterday to $71.97 per barrel. Gasoline was up 2.9% at $2.0393. Heating oil slid 0.6% to $2.0097 per gallon, following the pattern of natural gas. Natural gas lost 2.6% to $5.38. Year-to-date, natural gas is off 14.6%, having lost 13% just this month. It is trading at its lowest level since Sept. 27, 2006.

Katrina
CNBC's Scott Cohn reports that some developers are taking a risk in New Orleans, as he reports on the second anniversary of Hurricane Katrina.

U.S. Open
Darren Rovell has been spending his time at the U.S. Open in Queens, N.Y. Yesterday, he focused on Ana Ivanovic. Today, he will look at the business of catering the Open and private equity and tennis.

Questions? Comments? marketinsider@cnbc.com

  • 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 Senior Commodities Correspondent and 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.