(Recasts, updates with U.S. Treasuries, other prices)
By Nick Edwards
NEW YORK, Sept 14 (Reuters) - U.S. stock futures and the
dollar sank late on Sunday as the first official trades of a
new business week took place while talks to sell Lehman
Brothers <LEH.N> faltered, shaking confidence and pushing
dollar-exposed investors towards safe haven U.S. Treasuries.
U.S. Treasury yields fell sharply in early Asian trade on
Monday and Eurodollars <O#ED:> surged as concerns about the
stability of the U.S. financial system sparked talk of
emergency liquidity measures by the Federal Reserve or even a
cut in interest rates.
Two-year Treasury notes <US2YT=RR> jumped 20/32 in price,
driving yields down to a five-month low of 1.90 percent, from
2.22 percent late in New York on Friday while yields on 10-year
notes <US10YT=RR> dropped to 3.56 percent, from 3.72 percent.
U.S. stock index futures pared earlier falls in New York
late Sunday, but still pointed to a steep drop when trading
begins on Monday, with S&P 500 futures <SPc2> down 28 points
and the Dow Jones industrial average futures <DJc2> off 211
points and Nasdaq 100 <NDc2> futures 31 points softer by 2330
GMT.
The U.S. dollar fell around a cent versus the euro in
opening trade in Sydney and was quoted around $1.4300 <EUR=> at
2340 GMT, compared with $1.4225 in late U.S. trade on Friday.
Against the yen, the greenback dropped to 106.70/75 yen <JPY=>
versus 107.86 yen and the Australian dollar extended gains
above U.S. 82 cents <AUD=>.
Three-month Eurodollars were sharply higher across the
curve <0#ED:>, with the December contract jumping 0.195 to
97.260 and March next year up 0.280 at 97.465.
"It appears that Lehman will file for bankruptcy and the
risk of an immediate tsunami is related to the unwind of
derivative and swap-related positions worldwide in the dealer,
hedge fund, and buyside universe," Bill Gross, the chief
investment officer of Pacific Investment Management Co (Pimco),
told Reuters. Pimco oversees more than $812 billion in assets.
Uncertainty about the health of the U.S. financial sector
was running high with the fate of the 158-year old investment
bank Lehman Brothers still unclear. In addition, a takeover of
Merrill Lynch & Co <MER.N> and huge asset sales by American
International Group <AIG.N> were being talked about in markets
[].
That uncertainty fuelled talk in Asian markets that the
Fed, which holds a policy meeting on Tuesday, could announce
fresh measures to boost liquidity in the financial system or
even cut interest rates.
"You have to assume they will be standing by with extra
liquidity, though it's hard to know what extra they could do,"
said Tony Morriss, senior currency strategist at ANZ. "The Fed
may say something reassuring after its meeting and I suppose a
rate cut is not out of the question, though unlikely."
The Fed thus far has been expected to keep benchmark
lending rates on hold at two percent at its Tuesday meeting,
after slashing overnight rates 3.25 percentage points between
mid-September 2007 and the end of April in response to the
deepening credit crunch that has wracked global markets.
On Sunday, a rare emergency trading session opened in New
York to allow Wall Street dealers in the $455 trillion
derivatives market to reduce their exposure to a potential
bankruptcy filing by Lehman.
U.S. regulators and bankers were making last-ditch efforts
on Sunday to prevent toxic assets from ailing Lehman Brothers
spilling into global markets and rupturing investor faith in
the international financial system. []
While the fate of the U.S. financial system was the focus
of most early trading, initial reports that the passing of
Hurricane Ike through country's energy production centre had
not severely damaged infrastructure in Texas saw benchmark oil
prices fall more than to $2 to a six-month low below $99 a
barrel. []
"The oil market is selling off because the early
indications show Ike didn't do as much damage as feared," said
Chris Jarvis, senior analyst at Caprock Risk Management. "That
said, this sell-off could prove to be a bit premature, since it
could be a while before things get back to normal."
Oil <CLc1> fell $2.38 to $98.80 a barrel by 2150 GMT after
falling as low as $98.46 -- the lowest since February 26 --
adding to a steady downtrend prices since mid-July's peak of
over $147 a barrel as evidence mounts that high energy costs
and a weakening economy are cutting into fuel consumption.
SPECIAL TRADING SESSIONS
But it was the special trading session opened for financial
derivatives dealers that sources said was initiated by the U.S.
Federal Reserve, that set the wider tone for asset markets.
Trading involved credit, equity, rates, foreign exchange
and commodity derivatives with the aim of reducing risk
associated with a potential bankruptcy filing by Lehman
Brothers Holdings Inc.
"Trades are contingent on a bankruptcy filing at or before
11:59 p.m. New York time Sunday (0359 GMT)," said the
statement. "If there is no filing, the trades cease to exist."
Britain's Barclays Plc <BARC.L>, which had appeared to be
the frontrunner to take over Lehman -- excluding its bad
mortgage-related assets -- pulled out of the bidding early in
the afternoon, according to a person familiar with the matter.
That raised the risk of a Lehman bankruptcy. Lehman hired
law firm Weil Gotshal & Manges to prepare a potential
bankruptcy filing, the Wall Street Journal reported on Saturday
in its online edition, citing a person familiar with the
matter.
A turbulent open on U.S. financial markets was expected
despite the special session, said Mark Grant, managing director
of structured finance at Southwest Securities, based in
Dallas.
"The market is going to be spooked. People will be fearful
and no one outside a very small group of people knows what
Lehman going into liquidation will mean," he told Reuters.
