Morning Update

Light calendar this week as focus remains on credit markets

Treasuries are modestly higher and credit markets remain all but paralyzed as banks hold onto excess funds. The overnight Libor lending rate rose, but the three-month Libor rate eased by 5 basis points to 4.28% following five consecutive increases. Separately, the Federal Reserve announced it will boost the size of its Term Auction Facilities.

The week's economic calendar will be fairly light and will include pending home sales on Wednesday, weekly initial jobless claims and wholesale inventories on Thursday, and the trade balance and the Import Price Index will round out the week on Friday. Weekly jobless claims are likely to get top billing since it provides the mostly timely data on the labor market and economy. The latest round of the credit crisis has caused dislocations in the credit markets and has sharply curtailed intra-bank lending. And the hesitation by banks to lend to each other has reduced loan activity to creditworthy individuals and businesses as well. No doubt, this could pressure economic activity.

The FOMC minutes released tomorrow will get some play and may provide more details about how Fed officials felt about the credit markets and Lehman Brothers imminent demise. But much of the discussion may seem stale given the near paralysis in the money markets that has ensued since the meeting.

Also look for comments from Fed Chairman Ben Bernanke tomorrow afternoon when he speaks on the economy and the financial markets, while European Central Bank President Jean-Claude Trichet will speak in Washington, D.C. on Thursday evening. Other Fed speakers that may shed some light on the deepening gloom setting in over the markets as well as provide a road map to deal with the current situation include Chicago Fed Chief Charles Evans and Dallas Fed Chief Richard Fisher later today.

Deepening credit crisis pounds world markets

Despite the passage of the $700 billion rescue plan in the US designed to restore confidence, shares across Europe are trading at a four-year low and are down 5% in afternoon action as fears intensify that the credit crisis will spread and sharply curtail economic activity. Germany and Denmark announced they will guarantee all bank deposits, following Ireland's move last week to guarantee all deposits in the top six banks in order to prevent panic withdrawals as money markets remain extremely tight. Sweden also expanded coverage and Spain said it was ready to act if the ECB does not take concrete action. And Austria said it would decide later in the week whether it would follow suit.

Officials in Germany said late yesterday that private banks will inject another 15 billion euros in Hypo Real Estate (HREHF $10), which was near bankruptcy because its Ireland unit cannot refinance debts, and the state will back the first 35 billion euros because a consortium of banks withdrew from the rescue package over the weekend. German Chancellor Angela Merkel said troubles swirling around the real estate and mortgage financier could not be allowed to spread through the system. Elsewhere, France's BNP Paribas (BNPQY $47) said it will take control of troubled Dutch-Belgian Fortis (FRTSF $23) for cash and stock of 14.5 billion euros, while the euro is down sharply against the dollar amid a flight to safety.

In emerging market action, Russia halted trading after its dollar-denominated benchmark index fell by 15%. The flight out of Russia by foreign investors has helped force down shares by about 65% since May. Banking officials in Pakistan are looking for the central bank to ease the liquidity crunch after overnight rates jumped past 25%, and South Korea said it would access foreign exchange reserves to help with loans.

A gloomy economic outlook and worries that the US government's rescue plan may not be enough to bring calm back to the credit markets encouraged a new bout in selling in Asia. The Nikkei 225 Index in Japan closed down 4.3% to a four-year low. Banking shares were among the big decliners in Tokyo, while fast-falling commodity prices took a toll on the mining group. Elsewhere, shares in Taiwan, South Korea, China and Hong Kong all lost between 4-6%.