America's Mortgage Meltdown Causes Shockwaves in Europe

Mike has the latest on how credit crisis is causing a crisis in European asset-backed securities funds. This is why US futures are swooning this morning. It should be a red-ink day, but who knows how the day will end.

Let me add my own view to Mike's take:

The skinny is that BNP Paribas announced that it is freezing redemptions in three asset backed securities funds due to inability to fairly value their holdings.

The ECB is so concerned it flooded the euro credit market with $130 billion in liquidity. Monetary authorities are clearly concerned that the recent practice by asset backed hedge funds of arbitrarily suspending all redemptions may cause a crisis of confidence in all capital markets as investors decide to seek liquidity first and ask questions later.

We keep hearing that the damage is "contained," only to hear of a new infection a few days later. The true danger to the markets comes if the losses in sub-prime assets cause serious price volatility in other less risky fixed income assets potentially creating staggering losses in mega-banks and broker dealers. This would be like a “seizure” in the financial markets. Andd that would probably be bad news for all asset classes.

Gold has not been bid up on this news -- in fact, it's down. This is probably the giant sucking sound of Japanese funds being sucked back to Tokyo, and US speculators liquidating their solid investments (gold) to cover bad investments (in the credit markets).

The yen, the Swiss franc, and the US dollar could all rise in the short term, as panicked investors liquidate investments and stuff it in cash.

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