- Markets are attempting to show some stabilization as traders focus on the ongoing testimony of Fed Chairman Bernanke and Treasury Secretary Paulson before the Senate. Stock markets are trying to recoup some of yesterday's heavy losses, and are experiencing greatly reduced volatility in the early going. Oil has dropped to around the $108 levels now that yesterday's short squeeze is a memory and "fundamentals" are back in the driver's seat. Note that natural gas is up 4%, at least in part prompted by comments from the CEO of Chesapeake Energy, who told a Merrill Lynch energy conference that he expects producers to idle 200-400 rigs over the next six months due to declining prices. Newswires reported excerpts from Paulson and Bernanke's prepared remarks early this morning. Paulson has noted that the government must move beyond a case-by-case approach in calming market turmoil, while Bernanke has urged Congress to prompt action that is needed to avert "very serious consequences" from the financial crisis. Among the financials, AIG+17% and WM+4% are making big moves this morning. Last night reports circulated that a group of AIG shareholders will ask the company not to sign any deal with the US government. WaMu has shot up 14% after the open as investors digest reports that Toronto Dominion is mulling its own bid for the firm and news that the Fed has loosened rules that had limited the ability of buyout firms and private investors from taking large stakes in banks. JPM, C, WFC and BAC are in positive territory despite the fact that Oppenheimer's influential analyst Meredith Whitney was out with a note lowering her view of quarterly and full-year EPS performance at the banks. Whitney also widened her estimates for WB-10%, which is also down sharply due to news sinking in that talks on a deal with Morgan Stanley are clearly dead. Elsewhere tech names are showing strength, with sector leaders MSFT, AAPL, CSCO, ORCL, GOOG and DELL up around 2-3%. Retailer CACH-26% slashed its guidance outlook for the coming quarters yesterday after the close, earning itself multiple downgrades and price target cuts overnight.

- Treasury prices are once again seeing better buying in the shorter maturities as a flight-to-safety bid lingers. The curve is steeper but in late morning trading yields are pushing higher across the curve. In a sign the functioning in credit markets is far from normal, the three-month T-bill yield has fallen back below 1% while the LIBOR/OIS spread is moving up once again.

- The greenback exhibited choppy price action during the US morning, but maintained its overall price range from the Asian and early European sessions. The USD encountered a bit of turbulence in early trading after extended previews of Bernanke's testimony came out early, especially his "financial stresses are high and have intensified significantly" comment. The EUR/USD retested the 1.4700 level after a German CDU official said that the ECB's Weber expected 2009 growth in Germany may be slightly lower than 1%, mirroring recent press speculation. Over the weekend, Der Spiegel reported that the German government would lower its 2009 GDP forecast to 0.5% from current 1.2% view. Central banks are continuing liquidity operations, helping to staunch the bleeding in the credit markets. The overnight dollar LIBOR fixing came in at 2.95% compared to yesterday's 2.97% fixing, while the three-month USD fixing held relatively steady at 3.21% versus Monday's fixing of 3.20%. The TED spread and three-month OIL/LIBOR has exhibited some degree of steadiness with 235bps and 133bps levels, respectively, late morning in New York.

- Concerns regarding the global economic slowdown are being reflected in numerous data releases, with the Italian Government confirming a reduction of its GDP growth forecast as exhibit A. However, ECB members are continuing to tout the bank's standard inflation view: the ECB's Weber noted that he remains concerned over the Euro Zone inflation outlook.