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Market Trading: A Very Active Day Ahead?

There's a calmer tone on Wall Street for now, but traders doubt it will stay that way. Stock futures are higher and had been gradually improving ahead of the opening. RWH Financial's Bob Iaccino said on "Squawk Box" that some of that move has more to do with trader hesitancy about today and short covering.

"That's from some of the U.S. traders waking up, looking at their positions and covering before the start of the day. It's very important because there's periods of time, and this happens to be one of them, where traders won't establish positions before seeing the tone for the day. They'll just cover old positions," said Iaccino, president of alternative investments at RWH.

"So even the open today and a couple hours after the open...That move is not going to be indicative for the rest of the day, not even close," says Iaccino.

"A lot of investors watch the moves day-to-day, and they get very nervous when based on their risk profile. it's not necessary. They don't need to look at the market and say 'it's down 280 today. I'm nervous because in 20 years I might not have any money left,'" Iaccino said. "Most investors need to look at yesterday's drop and say 'everything's ok. I have another 20 to 25 years before I retire and things should be fine by then."

European markets are mostly firmer this morning, but Asian stock markets closed lower after yesterday's big U.S. decline. Oil is firmer this morning, rising above $72 per barrel. Oil inventory data is due at 10:30 a.m. New York time.

In the News
Dow component Altria , is considering today whether to spin off its Philip Morris Internationl unit. Citigroup analyst Bonnie Herzog says she thinks there's a 90% chance the Altria board will approve a spinoff. "We do believe the upside is greater than the potential downside risk," she said. The spinoff could give Altria shares a five to eight percent lift. The international cigarette business is growing while domestic tobacco is in decline and Philip Morris has separated the two businesses operationally, clearing the way for a breakup.

Financial Phobia
Hidden dangers in financials firms has been one of the biggest worries on Wall Street this week. Today, the New York Times and others report on Cheyne Capital Management, a London money management firm that may be forced to liquidate assets backing its $10 billion commercial paper program. U.S. brokerage stocks were the worst performers yesterday, down nearly 3.5%.

"People are speculating as to what might be out there in the financial firms. Right now, there's concern there may be more bad positions in some of these special investment vehicle (SIV) units at some of the large institutions around the globe. People are nervous about SIVS. They are off balance sheet and its not clear what's in them," said CNBC's Rick Santelli.

No Soothing Words
Blame it on the Fed. Some traders say the Fed's report of its Aug. 7 meeting minutes yesterday rocked the stock market more for what it failed to say than what it actually did say. The Fed said it was watching the financial markets and that a further deterioration could not be ruled out. The reaction in markets might also "require a policy response" if economic growth is threatened, the Fed said. But all that implied for some traders is that the Fed may not respond with a rate cut in September, as they anticipate.

The Dow, already weak yesterday, lost more ground after the 2 p.m. Fed release. It had its worst point decline since Aug. 9, losing 280 or 2.1% to 13,041. The Nasdaq fell 60 or 2.4%, and the S&P 500 slumped 34 points or 2.3%.

Bonds were moving on some of the other concerns that were also denting the stock market - the fear that borrowing is getting more expensive and that more bad credits are buried in financial companies.

The yield on the 10-year moved from 4.56% to 4.51% during the course of the day as a buying spree in Treasuries caused a ripple affect along the yield curve. The move in the two-year was even more dramatic. Overnight Monday, it was at 4.36% and by yesterday afternoon it was yielding 4.12%. This morning it was 4.13%

"The whole curve is not only steepening. Rates along the entire curve are moving down," said Santelli. Traders yesterday were watching a flurry of new corporate debt issuance. For one, Capital One brought $1.5 billion to market and it priced 225 basis points above 10 year Treasuries. "That is definitely juicy," said Santelli of the Cap One pricing. It was closely watched to see what type of risk premium would be put on a financial company of investment grade quality.

"There's a feeling that it will cost companies. it will be more expensive to borrow and that the credit issues are long from being cleansed out of the market place," said Santelli.

Once more the Treasury auctioned short term securities yesterday. A $30 billion auction of one-month Treasury bills drew a yield of 4.52% bringing the week's total bill issuance to $73 billion so far.

"I think we got bills back to levels where they make sense. I think we've kind of shaken the tree. The craziness is gone for the time being. I don't think we're going to get to the levels we were at last week any time soon. I think it was probably a healthy kind of purging of the bill market. It's gotten things back in line with where they belong. ln the grand scheme of things they make more sense," said Jim Galluzzo of RBS Greenwich Capital.

Asia Rising
CNBC Asia's Amanda Drury continues her week long visit in the U.S. She spoke about South Korea's stock market with us yesterday. South Korea's Kospi index is down more than 5% for the month but remains up 27% year to date.

"Korea in July was everybody's darling. Everybody you talked to said they loved Korea. One of the reasons was it was a highly tech exporting market," she said, noting investor favorites, Samsung and LG. "I think fundamentally the story is in tact," she said. "People are still bullish for tech in the second half."

But the Korean economy, and market, will follow the U.S. "It's economy is mainly export. and when you have an exporting economy if the U.S. consumer slows than Korea will suffer," she said.

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'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.