Monday, October 06, 2008

US Economic Crisis Bulletin: Despite Capitalist Governmental Intervention, Global Markets Are Threatening Total Collapse

US Economic Crisis Bulletin: Despite Capitalist Governmental Intervention, Global Markets Are Threatened With Collapse

By Chris Giles in London, Michael Mackenzie in New York, John Aglionby in Jakarta, and Alan Beattie in Washington
October 6 2008 21:23

Stock prices collapsed around the world on Monday amid growing fears that the credit crisis would trigger a global recession. The wave of selling swept through markets despite a scramble by governments to tackle the crisis, leading to speculation about co-ordinated emergency rate cuts by the Federal Reserve and other central banks.

The FTSE Eurofirst 300 index had its third worst day ever, plunging 7.75 per cent, while in France the CAC 40 slumped to its second worst day on record and the FTSE 100 in London suffered its biggest one-day points loss ever. The Dow Jones Industrial Average was down as much as 7.75 per cent, at 9,525.32 - falling below the 10,000 mark for the first time since October 2004 - before closing down 3.6 per cent at 9,955.00.

“There is a need for confidence in solvency and liquidity [in banks] but there is a lack of trust,” said Mark Kiesel, portfolio manager at Pimco. “People are far too hesitant to take risk and stocks are reacting to the outlook that as leverage is reduced, return on equity will be much lower.”

Emerging markets were particularly hard hit. The MSCI Emerging Markets Index slumped 11 per cent, its largest daily decline since 1987. Trading was temporarily stopped in some major emerging economies, including Russia, where the market fell by just over 19 per cent, and Brazil, where stocks fell as much as 15 per cent.

“This has been the biggest day so far for the capitulation of the long emerging markets trade, which has been in the works for weeks,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Robert Zoellick, president of the World Bank, said the crisis in Europe and the US could prove a “tipping point” for many developing countries as falling exports and worsening credit conditions triggered business failures and banking emergencies.

The falls came despite a rash of government initiatives around the world, which seemed to have no positive effect on confidence, leaving investors to rush to the safety of government bonds.

European equities were pummelled as investors took no comfort from grand statements from the continent’s leaders at the weekend promising a co-ordinated approach and followed by individual actions. Across Europe, governments followed Germany’s weekend move to guarantee retail savers’ deposits, with similar steps taken in Denmark, Sweden and Austria.

In Latin America, equity markets headed for their worst day since the 1998 Russia crisis, hit by falling world raw materials prices and a stampede into US safe-haven bonds. Earlier in Asia, Japan’s benchmark Nikkei 225 index plunged 4.3 per cent to a 4½-year low, while other markets such as Jakarta suffered a 10 per cent drop on the day.

Copyright The Financial Times Limited 2008

Dow Drops Under 10000 as Bank Woes Persist


Deepening fear that the global economy is ailing beyond the capacity of policy makers to cure it sent stocks into a downward spiral Monday.

Many traders believe the bloodletting could continue in the days ahead even though major market averages have now touched multi-year lows, punishing freewheeling Wall Street bettors and conservative buy-and-hold investors alike.

The Dow Jones Industrial Average, which was off 800 points at its intraday low, ended down 369.88 points, or 3.6%, at 9955.50, hurt by declines in all 30 of its blue-chip components. The Dow finished below 10000 for the first time since late October 2004, and it has slid 12.8% since the meltdown of Lehman Brothers Holdings threw Wall Street into crisis in mid-September.

Markets were rattled overnight after German regulators moved to guarantee all the country's bank deposits and to rescue Hypo Real Estate Holding, the latest in a series of bailouts in Europe. Government officials and corporate executives in seven other European nations also met to save various financial institutions around the region. The moves kept concern about further bank failures around the world high and sent European stock markets sliding, setting a bleak tone for trading before the opening bell in New York on Monday.

The news in Europe came on the heels of last week's contentious passage of a $700 billion rescue package in the U.S. for ailing banks. And on Monday, the Federal Reserve said it would begin paying interest on commercial banks' reserves and expand its loan program for squeezed financial institutions.

But the notion that there will be no quick fix for the problems besetting Wall Street -- and the global economy – took firmer hold among market participants of all stripes on Monday.

"We're seeing pure fear right now," said Don Bright, of the Chicago proprietary firm Bright Trading. "My guys who usually trade 5,000 shares at a time are now trading 1,000 or 2,000. They're a lot more skittish."

That attitude seemed to be widespread Monday and could mean there are more losses to come, said Doreen Mogavero, president and chief executive of the New York floor brokerage Mogavero Lee & Co. She said that Monday's decline, although bloody, didn't seem like a round of capitulation, or last-ditch selling to mark a market bottom.

"Yes, it's a big move, but there hasn't been the sort of volume behind it that we'd like to see," in order to confirm that there isn't another wave of sellers still waiting on the sidelines, Ms. Mogavero said.

She added: "People are looking at the [stock] market's fundamentals and realizing how long it's going to take to see some real relief."

What's Driving the Dow's Fall

The Dow Jones Industrial Average falls below 10000 as financial turmoil in Europe heightens. WSJ's David Gaffen parses the reasons behind the drop and how soon we can see the effects of the recently passed bailout bill. Kelsey Hubbard reports. (Oct. 6)

Other stock measures were hit hard. The technology-oriented Nasdaq Composite Index dropped 4.3% to end at a four-year low 1862.96. The small-stock Russell 2000 fell 3.8% to 595.91, a three-year low.

The S&P 500 slid 3.9% to 1056.89, the lowest close in nearly five years. All its sectors fell Friday, led by by technology, which tends to suffer when investors' risk appetite ebbs. The sector fell 5.5%.

With stocks plunging, indicators of investor anxiety flashed. The Chicago Board Options Exchange's Volatility Index, a key measure of investor fear, leapt 15.3% to 52.05.

Credit markets also continued to show signs of stress. The cost of borrowing overnight U.S. dollar funds in the interbank market had risen to 2.36875%, up from Friday's fixing of 1.99625%. Yields also fell sharply as investors again flocked to U.S. government debt.

The yield on the three-month Treasury bill fell below 0.5%, showing that investors are willing to accept almost no returns in exchange for the certainty that they'll get their cash back in hand after marking a short-term loan to the government.

The benchmark 10-year note gained a full point to yield 3.477% as investors rushed to move money into Treasurys and away from riskier assets like shares.

Oil futures tumbled $6.07, or 6%, to $87.81 a barrel, hurt in part by traders' concerns that fuel demand will suffer as the global economy slows in the months ahead.

Commodity traders rushed in an attempt not to get steamrolled as their market moved in tandem with the major stock-market indexes – an increasingly familiar drill. As the stock market falls, hedge funds and other deep-pocketed speculators tend to get margin calls from their stock brokers, which in turn prompts selling of commodities to raise capital.

Jonathan Pivnick, an energy trader who trades on behalf of MBF Clearing Corp., a firm with offices in the New York Mercantile Exchange building, said that, in the last few weeks, trading crude has been all about finding the right global market indicators that are triggering moves in energy markets. Recently, crude-oil markets have been trading in "very tight" correlation to S&P 500 futures, he says.

Anticipating how investors are using trend-following computer programs to bet on a drop in demand for energy is "crucial" when the crude oil markets are affected by the momentum of the broader stock market, he said. "For a while it was the dollar. Right now it's the S&P," he said.

Other raw materials suffered from fears of weakening demand. The Dow Jones-AIG Commodity Index ended down 5.1%.

Gold, which is traditionally viewed as an investor haven rather than an industrial resource, was a notable exception to the commodity selloff. Futures on the yellow metal leapt $33.80, or 4.1%, to $862.70 per ounce in New York.

"The stock market is down so much, it is sucking up capital out of everything, except for gold," said Mark Waggoner, president of Excel Futures Inc., a brokerage in Newport Beach, CA.

He said he got numerous calls from clients and didn't even have time for lunch. "I am getting to the point where I didn't want to take any phone calls," he said.

In economic news, the Conference Board said its employment trends index, an aggregate of eight labor-market indicators, fell 0.8% to 108.4 in September, down from a revised 109.3 in August. The index is down almost 10% from a year ago, suggesting that the U.S. labor market is likely to deteriorate sharply in the months ahead.

"The deterioration in the Employment Trends Index has become very pronounced, suggesting that the unemployment rate may very well exceed 7% as early as the second quarter of 2009," said Gad Levanon, senior economist at the Conference Board. "The persistent slackening in labor market conditions, worsened by the financial crisis, has reached a level that in the past led to significantly slower wage growth across most industries."

Charles Evans, president of the Fed's Chicago branch, said in a speech at an event sponsored by the Association for Technology in Lost Pines, Texas, that U.S. economic growth is "likely to be quite sluggish" into 2009, with the timeline for any recovery quite uncertain.

The dollar was mixed against major rivals. One euro recently cost $1.3506, down from $1.3806 late Friday. A dollar fetched 101.58 yen, down from 105.14 yen.

—Emily Barrett, Carolyn Cui, Ann Davis, Madeleine Lim, and Stephen Wisnefski contributed to this article.Write to Peter A. McKay at

Asian stocks sink on gloomy outlook

By Lindsay Whipp in Tokyo
October 6 2008 11:21

Asia-Pacific markets sank on Monday as investors focused on growing concerns about a global recession and the lengthening list of banks falling victim to the credit crisis, leaving the passing of the US government’s bail-out plan to fade into the background.

The Nikkei 225 dropped to the lowest in four and a half years, losing 4.3 per cent to 10,473.09, while the broader Topix sank to its lowest since December 2003, closing below the 1,000-mark, with a 4.7 per cent drop to 999.05.

Stocks in the Asia-Pacific region excluding Japan had dropped 5.4 per cent, the lowest since December 2005, by mid-afternoon in Asia. The MSCI Asia-Pacific ex-Japan stocks index was on track for the biggest daily decline since January 2008, down 5.3 per cent.

The decline in commodity prices took its toll particularly in Indonesia, where the composite index finished 10.03 percent lower at 1,648.74 points, its biggest one day percentage fall since October 2002 after bomb blasts hit Bali, killing more than 200 people. PT Bumi Resources, coal producer, slid 32 per cent to 2,175 rupiah and PT Astra Agro Lestari, a plantation company, lost 23 per cent to 10,000 rupiah.

“It’s absolutely the worst I’ve ever seen,” said one trader. “People are tired, so it’s almost not even dramatic anymore when you see the declines. Everyone’s still so shell shocked after September and things are still going down.”

The decline in US non-farm payrolls announced late last week was the largest decline since March 2003, heightening concerns about a recession in Asia’s most important trading partner, while economies in the region are also slowing.

Financials declined across the board as the fallout from the credit crisis showed no signs of abating. The Dutch government nationalised its part of Fortis and the remaining assets were sold to BNP Paribas. Meanwhile, the German government arranged a second bailout package for Hypo Real Estate after the first attempt failed.

In Japan, Mitsubishi UFJ declined 9.2 per cent to Y806 and Mizuho Financial slid 7.8 per cent to Y402,000. In Hong Kong, HSBC declined 2.2 per cent to HK$120.50, Construction Bank of China lost 7.3 per cent to HK$4.45 and ICBC fell 5.3 per cent to HK$4.13.

National Australia Bank lost 2.3 per cent to A$25.55, Macquarie Group declined 10 per cent to A$35.00 and Westpac Banking fell 3.1 per cent to A$22.50.

The yen’s surge against the dollar during Asian trading added to the woes of Japan’s exporters. Canon lost 4.2 per cent to Y3,680, Sony fell 6.6 per cent to Y2,810 and Nissan dropped 6 per cent to Y584.

Chiba Bank, one of Japan’s regional banks, slid 13 per cent to Y473 following a downward revision on its earning forecast by 64 per cent to Y19bn. This was due to losses on foreign bond holdings and its stock portfolio as well as making larger provisions for bad loans as bankruptcies in the domestic real estate and developer sector rise.

The Hang Seng dropped 5 per cent to 16,803.76, its lowest closing since July 2006, while the sub index of mainland Chinese shares traded in Hong Kong declined 6.6 per cent to 8,416.90.

Ping An shares dropped 8 per cent to HK$46.00, following its announcement it would take a loss of Rmb15.7bn ($2.3bn) from its investment in Fortis. Investors on mainland China took a slightly different view, with shares of the company listed in Shanghai gaining 1 per cent to Rmb33.40.

Elsewhere, commodity stocks also declined, which along with the decline in financial shares hurt Australia’s S&P/ASX 200 index, closing the day down 3.3 per cent at 4,540.4.

BHP Billiton declined 2.1 per cent to A$29.79, while Rio Tinto declined 5 per cent to A$84.48 and Woodside Petroleum fell 2 per cent to A$49.00.

China’s Cnooc, offshore explorer of oil and gas, lost 9 per cent to HK$7.58, while PetroChina, an oil and gas producer, declined 6.7 per cent to HK$7.19. In Japan, trading companies, which have large upstream investments in oil and gas fields, declined on the commodity price falls. Mitsui & Co. fell 7.2 per cent to Y1,114 and Mitsubishi Corp. dropped 5.7 per cent to Y1,827.

Stocks in Pakistan remained stuck as traders have held back from trading. Stocks were little changed, just down 0.01 per cent at 9,178.97, just above the floor of 9,144. Reuters reported authorities would discuss this Friday how long they could keep the floor and would mull ways foreign investors could pull out of the market.

In South Korea, the Kospi dropped 4.4 per cent to 1,358.75, the lowest since January 2007.

Shanghai shares joined the fray after a week-long holiday, declining 5.2 per cent to 2,173.738. The China Securities Regulatory Commission said it would introduce trial margin trading and short selling of shares to develop the stocks markets, despite moves across the globe to curb short selling in the wake of the financial crisis.

In Singapore, shares dropped 5.4 per cent to 2,172.40 on the back of its own economic woes, following reports that the finance minister had warned the economic slowdown there would continue into next year.

There was no let up for Mumbai either, where the Sensex was trading down 5 per cent at 11,905.82.

Copyright The Financial Times Limited 2008

Trading in Brazil suspended twice

By Jonathan Wheatley in São Paulo
October 6 2008 19:17

Stocks in São Paulo plunged by more than 15 per cent on Monday morning, triggering circuit breakers twice during the session.

Trading was suspended for half an hour in mid-morning but stocks continued falling when it resumed. The Bovespa’s main index fell below 38,000 points by late morning – losing almost half its value from its peak of more than 73,000 points in May – while the currency slumped to R$2.16 against the US dollar from R$2.04 at Friday’s close, a fall of 5.6 per cent.

When the fall in the index reached 15 per cent, trading was suspended again.

“Things have been bad since the collapse of Lehman Brothers but what panicked markets today was frustration over the failure to produce any co-ordinated action to reduce interest rates in Europe and the US,” said Vladimir Caramashi, strategist at Crédit Agricole in São Paulo. He said falling commodity prices had added to the climate of fear. “Until recently commodity prices were holding up in spite of the crisis but this sudden downturn has hit Brazil full on,” he said.

One local market trader dismissed recent comments by government ministers that Brazil – with much stronger economic fundamentals than during the crisis years of the late 1990s and more than $200bn in foreign currency reserves – was immune to contamination from turmoil on overseas financial markets.

“Brazil has never been shielded,” he said. “When the main pillars of the global financial system are falling, there’s nothing you can do to hold Brazil up.”

Foreign investors have been selling stocks in Brazil for several weeks to cover losses in other markets. During September, they withdrew more than R$19bn (US$9.5bn). At first, local investors appeared willing to pick up stocks at hugely reduced prices.

“Foreigners are selling but now locals are selling too and nobody is buying,” the trader said. “The funds industry is suffering a lot, investors are pulling their money out.”

Copyright The Financial Times Limited 2008

1 comment:

Unknown said...

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