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Quick Update on the overnight events in Europe:
As I put at the end of yesterday's Market view that "Barring any other shocking news...". Well, the shocking news came this morning, except that it's not from the US this time. News that BNP Paribas stopped redemption of three hedge funds caused all major European markets to plunge by more than 2% and led to Dow future to down more than 200 points before the US market open. BNP essentially is saying "Ok, I know I owe you money, but I cannot let you get it back". Now it becomes a "trust" crisis rather than a credit crisis. As most of us working in the financial field know, pretty much all models used for those complicated structured products are developed in house. In other words, nobody really knows whether the pricing is right or wrong until some events happen. In some cases, both counterparties would claim that they make money on the transaction. And traders from both sides take home millions of bonuses. Then, who lose? Now those poor pension fund managers suddenly realized that they cannot trust those model results anymore and asked for redemption from the hedge funds they put retiree's money in. Guess what? They are rejected!!! What a wonderful world we are living in...
Immediately following this shocking news, ECB(central bank in Europe) injected close to $100Billion Euro dollars to the financial system while US Fed injected $12B US dollars. Put that in perspective, using a conservative money multiplier of 3, it is equivalent to almost $300B Euro or more than 3% of European GDP into the financial system. Now the US market has priced in more than 100% chance that the Fed will cut interest rate at its September meeting. As long as ECB and Fed are in full control, I believe the crisis will be over very soon. But it will be another bumpy road ahead. As always, the biggest enemy under this kind of circumstance is to panic. Stay cool...

Market view:
Dow's 300+ points plunge essentially wiped out all gains it managed to get in the previous three sessions. Investors were afraid that they were left in darkness as just one week ago, the same BNP Paribas CEO said that its subprime exposure was minimal. This reminds me of the old saying: don't trust anyone on Wall Street. The VIX, or fear index created another 4-year high today. Risky assets are plunging across the board, which does prove a point that the correlation would become much higher during turmoil period. With this new event in Europe, I have to adjust my previous view towards the US market, that is, the market may remain weak until some events happen(e.g, rescue from the Fed).

Wall Street suddenly realized that the damage caused by the subprime loan is not as big as previously feared. With two Crown corps(read as Government) --- Freddie Mac and Fannie Mae --- ready to provide mortgage loans if necessary, some investors are busy covering their short positions while some others are afraid that they may be left empty handed. That being said, the market will remain volatile for the next few sessions(just as I typed this, the market shot up by more than 60 points). Treasury has a huge selloff as investors fled away from risk-free assets while Yen posted big loss against US dollar as investors return to risky assets. Oil price dropped even though the weekly inventory data provided some bullish supports, which is a very bearish sign for oil price. Most international markets have recovered somewhat from the recent selloff. Barring any other shocking news, the worst should be behind us.

What a day on Wall Street! Dow was down more than 100 points in the morning then went up by more than 160 points right before Fed's decision at 2:15pm then dropped more than 130 points right after the Fed's decision then shot up by more than 230 points before dropping more than 130 points and closing pretty much at unchanged level. The Fed's statement seemed a little disappointing but shouldn't be too surprising to many Wall Street firms. The market remained worrying about the credit issue and the scope of the damage should be known to investors within the next two weeks as many funds do their Mark-to-market calculation monthly. Oil price was stabled a little bit after yesterday's big selloff. As I mentioned in last week's update, if there is no major hurricane, the oil price should have peaked. VIX was dropping today but still in the 20+ level. I suspect it would slowly drop back to its normal range(12-15) by the end of this month.

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