Equity futures were down slightly until the Fed said it will create a special purpose vehicle to buy three-month commercial paper and promote liquidity in markets. No dollar figure was announced but it will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers.

"This is a huge development," said T.J. Marta, fixed income strategist at RBC Capital Markets. "As we have been warning, the economy has been experiencing the equivalent of a stroke as short-term funding has been completely blocked. This endeavor should largely eliminate the blockage that we had expected would continue through yearend if policymakers did not act."

S&P 500 futures spiked 20 points higher after the program was announced. The euro, oil and two-year U.S. yields also jumped. Overnight U.S. commercial paper yields fell to 2.94% from 4.57%, according to Bloomberg.

But sentiment continues to prove delicate. Shortly after the equity open, share prices turned negative as Treasuries rose higher.

Banking strains continue to appear around the world. Standard & Poor's cut Iceland's sovereign rating to junk after the nation's second-largest bank needed a bailout.

The Reserve Bank of Australia surprised markets by cutting rates by a full percentage point late on Tuesday to 6.00% from 7.00%. A consensus forecast had predicted the bank to cut by only 50 basis points to 6.50%. In his statement on monetary policy, RBA Governor Glenn Stevens said the unusually large move was due to recent changes occurring in the balance of risk, and a need to reduce borrowing costs.

Toronto's S&P/TSX composite index is up nine points to 10239, the Dow Jones industrial average is down 38 points to 9917, the S&P 500 is lower by five points to 1052 and the Nasdaq is down 16 points to 1847.

European stock markets are higher, with the Eurostoxx up 26 points to 2549, the UK FTSE 100 up 53 points to 4642 and the German DAX up 14 points to 5401.

Asian markets were lower, with the Japanese Nikkei closing down 317 points to 10156 and the Hang Seng Index down 879 points to 16804.

The Canadian dollar is down 0.0037 to 0.9067 against the U.S. dollar (1.1032 USD/CAD) and up 0.05 to 92.69 against the yen.

The U.S. dollar is up 0.43 to 102.25 against the yen and the Dollar Index is down 0.844 to 80.831.

The euro is up 0.0171 to 1.3673 against the U.S. dollar, up 0.0240 to 1.5082 against the Canadian dollar, up 0.0023 to 0.7764 against the pound sterling and is higher by 2.26 to 139.74 against the yen.

The pound sterling is up 0.0170 to 1.7611 against the U.S. dollar and up 0.0252 to 1.9426 against the Canadian dollar.

WTI crude oil is up $2.62 to $90.43. The front month gold contract at the Chicago Board of Trade is up $12.00 to $878.50 per ounce.

U.S. two-year yields are up 5.5 bps to 1.49%, with five-year yields up 3.9 bps to 2.48%, 10-year yields up 4.8 bps to 3.50% and 30-year yields up 2.9 bps to 4.00%. The Eurodollar March 09 contract is down 7.5 ticks to 97.79. The yield curve is flatter, with the 10/2-year spread down 1.7 bps to 200.66 bps.

Yields on two-year Canadian government bonds are up 3.6 bps to 2.27%, with five-year yields up 3.7 bps to 2.76%, 10-year yields up 3.2 bps to 3.47% and 30-year yields up 3.5 bps to 4.02%. The December 08 BAX contract is down 2.5 ticks to 97.55.

In Germany, returns on two-year German bonds are up 9.1 bps to 3.15%, with five-year yields up 6.1 bps to 3.46%, 10-year yields flat at 3.76% and 30-year yields down 6.7 bps to 4.13%.

Yields on UK two-year bonds are down 5.0 bps to 3.62%, with five-year yields up 1.6 bps to 3.87%, 10-year yields up 4.0 bps to 4.26% and 30-year yields up 4.0 bps to 4.27%.

All data taken at 10:05 a.m. EDT.

By Adam Button, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it

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