Thursday, October 02, 2008

US Economic Crisis Bulletin: Wall Street Falls as Jobless Claims Hit Seven-year High

Wall St falls as jobless claims hit seven-year high

By Alistair Gray in New York
October 2 2008 15:07

Wall Street stocks fell on Thursday morning as initial jobless claims hit a seven-year high and ongoing uncertainty over the ultimate fate of the $700bn financial sector rescue package weighed on investors.

Worse-than-expected jobless claims figures underlined the high stakes the credit crisis poses for an already weak economy.

The number of US workers filing new claims for jobless benefits rose to their highest in seven years, although the figures were worsened by the impact of hurricanes Ike and Gustav.

Initial jobless claims were at 497,000 in the week to last Saturday, above economists’ forecasts of 475,000, Reuters reported.

Although US senators revived the plan on Wednesday night, investors remained cautious ahead of another vote from the House of Representatives expected for Friday.

The House threw out the bill earlier in the week, leading US stocks to their biggest one-day fall since 1987.

Investors will also keep an eye on factory order figures due to be released after the markets open. Industrials, which led the market declines in the previous session, after a gauge of manufacturing activity contracted to its lowest level in seven years, could face further declines.

Shortly after the opening bell, the S&P 500 was down 2 per cent at 1,137.05. The Nasdaq Composite index was also down 2 per cent at 2,027.82, while the Dow Jones Industrial Average fell 1.8 per cent to 10,636. 89.

Regulators are to extend a temporary ban on short selling of financial stocks that was due to expire after the session on Thursday.

Banks continued to hoard cash amid ongoing paralysis in the money markets. The rate at which banks lend to each other – as measured by three-month dollar Libor – was fixed at 5.31750 per cent, higher than any time since the credit crisis intensified in September.

Yet overnight dollar rates fell more than a full point to 2.68125 per cent from 3.79375 per cent.

In the previous session, another volatile day ended in the red after General Electric’s revealed a dramatic $15bn capital raising.

General Electric fell another 2.6 per cent to $22.89 in pre-market trading. Reports suggested the group may sell stock at up to a 9.2 per cent discount.

Elsewhere, Marriott International fell 4.8 per cent to $23.88 after the hotel operator disappointed with its third-quarter earnings as companies and consumers curtailed on travel.

Constellation Energy rose 9.5 per cent to $26.00 after the Financial Times reported EDF was nearing a deal with private equity group KKR to trump Warren Buffett’s $4.7bn takeover.

EBay lost 2.9 per cent at $20.25 after Morgan Stanley downgraded its recommendation on the internet auctioneer from “overweight” to “equal weight”.

European stocks were higher ahead the open on Wall Street. The FTSE Eurofirst 300 added 1.4 per cent to 1,087.56. Asian equity markets closed mainly down, led by Japanese carmakers. The MSCI Asia Pacific Index was 1.6 per cent to 107.24 by late afternoon in Tokyo.

Bond yields were lower. The yield on the two-year Treasury note was 7 basis points lower at $1.743 while the yield on the 10-year Treasury note was 4 basis points at 3.697 per cent.

The dollar was higher against major currencies early in New York. The dollar rose 0.3 per cent to $1.7660 against the pound, climbed 0.7 per cent to SFr1.1322 against the Swiss franc and gained 0.5 per cent to $0.7865 against the Australian dollar.

Gold was trading $13.5 lower at $873.8 per troy ounce.

Oil prices were lower early in New York. US crude prices were down $1.10 at $97.43 a barrel.

Copyright The Financial Times Limited 2008

Senate backs rescue plan by wide margin

By Daniel Dombey and Krishna Guha in Washington, Tony Barber and Nikki Tait in Brussels and Ben Hall in Paris
October 2 2008 10:56

The US Senate on Wednesday night approved by a large margin the Bush administration’s $700bn plan to rescue the financial system, while European policymakers clashed on Wednesday over how to protect their own banks.

Both Barack Obama and John McCain, the Democratic and Republican candidates for the president, backed the measure in the 74-25 vote in favour.

The Senate vote puts further pressure on recalcitrant Democrats and Republicans in the US House of Representatives, who threw out the bail out plan on Monday and came under intense pressure from their leaderships on Wednesday to switch their votes.

Ahead of a new House vote expected for Friday, leaders from both parties expressed hopes that additions to the bill, including a large increase in the deposit guarantee ceiling, would sway dissenters.

The vote came after an appeal on the Senate floor by Mr Obama, who warned fellow legislators, ”We can’t afford to take a risk that the economy of the US and, as a consequence, the worldwide economy could be plunged into a very, very deep hole.”

Amid rising confidence that the House would reverse its earlier stance, President George W. Bush called on both chambers of the US legislature to approve the measure ”to get credit flowing again”.

On Wednesday night Mr Bush praised senators for the vote. ”I applaud the Senate for its strong bipartisan vote in favor of the financial rescue plan,” he said. “The American people expect – and our economy demands – that the House pass this good bill this week and send it to my desk.”

In a move intended to shore up confidence in banks, the legislation would give the US’s Federal Deposit Insurance Corporation the unlimited ability to borrow from the Treasury for a temporary period.

Robert Zoellick, president of the World Bank and a prominent Republican, told the Financial Times it was essential that Congress passed the legislation. “The implications are important not only for the US but for the global financial system, including the developing world,” he said.

Earlier, Christine Lagarde, the French finance minister, raised the possibility of a European fund “to support the financial sector”. But the idea of a fund, which some European officials said could hold as much as €300bn ($421bn), was rejected by Germany, and France was already rowing back.

The UK is also sceptical, preferring to tackle crises on an ad hoc basis, although officials at the Bank of England and Treasury are working on several plans in case the need arises for a more co-ordinated approach.

French officials said their government was not pushing a specific plan but the idea of a pool would be discussed among other ideas at a meeting of European leaders in Paris on Saturday.

The idea is to help bail out banks, not mop up toxic assets, as in the $700bn US Paulson plan. It comes as governments on both sides of the Atlantic scramble to find ways to contain unprecedented stress in the global financial system.

In Europe, José Manuel Barroso, the European Commission president, said the crisis made it imperative to strengthen banking supervision at EU level, declaring: “It is essential to go beyond the short-term measures and to put into place a structured, a truly European response.”

But a Commission proposal, unveiled on Wednesday, to impose tougher capital requirements on banks ran into opposition from Poland and other central and eastern European governments.

A separate dispute flared over Ireland’s decision to guarantee the debts and deposits of its six largest lenders – a step that instantly attracted funds from the UK, where bank customes suspected the guarantees would be less comprehensive.

Early on Thursday Ireland’s lawmakers overwhelmingly endorsed the plan in separate votes in the lower house and the senate.

Brian Lenihan, Ireland’s finance minister said he was “sympathetic” to Royal Bank of Scotland’s application to have its Irish subsidiary included in the guarantee system.

Dublin said it would consider applications to join the scheme from foreign banks with a significant retail presence in Ireland.

Neelie Kroes, EU competition commissioner, said Dublin’s move recalled the “go it alone” policies that characterised Europe’s response to the 1930s Depression. “I would like to plead to national governments today not to act unilaterally,” she said.

Copyright The Financial Times Limited 2008

Factory data show world economy suffering

By Chris Giles in London
October 1 2008 18:31

Manufacturers across the world’s advanced economies suffered a torrid September, surveys suggested on Wednesday, providing clear evidence that the real economy has been unable to escape the woes of the financial sector.

From Japan, across Europe and in the US, surveys of manufacturers were bleak with readings suggesting output was falling.

The only bright spot was China, where an equivalent survey showed a bounce back in manufacturing in September after a weak August.

Sentiment among large manufacturers in the Bank of Japan’s closely watched Tankan survey turned negative for the first time since June 2003, continuing a trend of falling confidence in the world’s second largest economy that has gathered momentum for the past year.

In the eurozone, the purchasing managers’ index for September was confirmed at 45, down from 53.2 a year ago. Any figure above 50 indicates a majority of the survey’s respondents are reporting rising output while lower figures suggest contraction.

In Britain, a sudden drop in the equivalent PMI index from 45.3 in August to 41 last month, the weakest on record, highlighted the fragility of the economic outlook and the vulnerability of UK manufacturers to global events in spite of a fall of 15 per cent in sterling over the past year.

Ben Broadbent of Goldman Sachs said: “It appears that the manufacturing sector is getting little relief from the sharp decline in sterling”.

So steep was the decline that several prominent City of London economists switched their predictions to forecast a rate cut when the Bank of England meets next week.

Simon Hayes of Barclays Capital said: “The ongoing market turmoil, and associated general feeling of gloom . . . will make it relatively easy for the Monetary Policy Committee to sell a rate cut as being consistent with hitting the inflation target in the medium term, even as inflation hits 5 per cent”.

There was no relief from the other side of the Atlantic as the Institute for Supply Management said its survey of US manufacturers indicated output falling at its fastest rate since October 2001.

Norbert Ore, chair of the ISM said: “The PMI indicates a significantly faster rate of decline in manufacturing during September, marking a departure from the 2008 trend toward negligible growth or contraction each month.”

The last time the US experienced such a sudden drop in its index was in January 2001, and helped prompt the Federal Reserve under Alan Greenspan, its then chairman, to cut rates by half a percentage point outside a scheduled meeting.

With all the big advanced economy manufacturing sectors reporting falling output, the prospects for the world economy are growing weaker by the day. But not all the world is suffering. China’s manufacturers’ have bucked the trend, buoyed by the government’s switch to more expansionary policies and the end of the Olympics, which forced many factories around Beijing to close.

China’s PMI index increased to 51.2 from 48.4 in both August and July, although it was still well down on the 59.2 reading of April.

Copyright The Financial Times Limited 2008

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