Morning Update

Stressed out credit markets

Treasuries are higher amid a flight-to-safety as US equities sell-off and fears rise that the passage of the government's rescue plan is in doubt. Anxieties remain very high in the short-term credit markets and spreads, which measure risk, are extremely elevated. The three-month Libor rate to borrow dollars held at 3.76% and the TED spread remains at very elevated levels. To ease strains, the Federal Reserve increased its swap lines by $13 billion. The European Central Bank and the Bank of England added $35 billion and $31 billion, respectively. And the BoE said it will hold a long-term repurchase operation that will provide 40 billion British pounds on Monday. Still, the aversion to risk is high and banks continue to hold onto excess cash. Quarter-end funding is exacerbating already-tight credit markets.

Elsewhere, final 2Q GDP was revised lower by 0.5 percentage points to an annual rate of 2.8%, missing the Bloomberg forecast of 3.3%. The core PCE Price Index was revised from 2.1% to 2.2%, just above the forecast of 2.1%. The final look at 2Q GDP is dated as 3Q is nearing an end, and traders are much more focused on the credit crisis. Shortly after the market opens, final University of Michigan consumer sentiment will be reported. A rise from 70.8 to 73.1 is forecast.

Blocked bailout hits Europe, Asia falls

Worries about whether US lawmakers can strike an eleventh-hour deal to rescue the financial system are placing heavy pressures on European equities. Dutch-based Fortis (FRTSF $24) is down sharply amid persistent talk that it may have to sell important assets to bolster capital. Belgium regulators said they are watching the situation closely, and the company said it has "no liquidity issues." The announcement that WaMu was seized by the FDIC is adding to the jitters.

Reaction to the latest drama in Washington sent stocks in Asia lower but reaction was more muted. The Kospi Index in South Korea lost 1.7%, Hong Kong's Hang Seng Index fell 1.3%, and the Nikkei 225 Index in Japan closed down 0.9%. The Bank of Japan added 11 billion yen to ease the strains in the credit markets, while uncertainty over the prospects of the bailout is pushing up the yen by more than 1% against the greenback. On the equity front, tech exporters were hit by worries about the US economy. And maritime shippers tumbled for the third day in a row and led today's sell-off as the Baltic Dry Index - a measure of shipping rates - extended its recent slide.