Archive for October, 2008

World leaders pledge financial reform as gloom deepens (AFP)

Saturday, October 25th, 2008 | Finance News

World leaders vowed Saturday to overhaul the global financial system in the face of recession fears, but US President George W. Bush urged nations to "recommit" to free markets despite economic turmoil.

After a week of growing economic gloom and plunging stock markets, Asian and European leaders meeting in Beijing promised wide-ranging reforms while UN Secretary General Ban Ki-moon also called for quick change.

"Leaders pledged to undertake effective and comprehensive reform of the international monetary and financial systems," the 40-member Asia Europe Meeting (ASEM) said in a statement released late Friday.

"They agreed to take quickly appropriate initiatives in this respect, in consultation with all stakeholders and the relevant international financial institutions."

China's Premier Wen Jiabao called for more regulation of the world's financial system, saying after the summit "we need to draw lessons from this crisis."

"We need financial innovation to serve the economy better, however we need even more financial regulation to ensure financial safety."

Wen confirmed China's participation in a crucial summit in the United States on November 15 aimed at tackling the financial meltdown, without specifying which Chinese leader would attend the meeting of 20 industrialised and emerging powers.

The economic turmoil has led to growing criticism of US-style free market capitalism, with French President Nicolas Sarkozy earlier this week saying "the ideology of the dictatorship of the market... is dead."

But Bush on Saturday, moving to set an agenda for the upcoming international economic summit, said its participants must "recommit" to the principles of free enterprise and free trade.

"As we focus on responses to our short-term challenges, our nations must also recommit to the fundamentals of long-term economic growth -- free markets, free enterprise, and free trade," Bush said in his weekly radio address.

The US president, who leaves office in January, added that "open market policies have lifted standards of living and helped millions of people around the world escape the grip of poverty."

Ban said the Washington meet must address the need for change and joined chief executives of key UN institutions in calling for considered but large-scale reforms.

"The market and regulatory failures that have led to this crisis must be addressed as a matter of urgency," a joint statement said.

"We reaffirm the need for meaningful, comprehensive and well-coordinated reform of the international financial system and pledge our support to this end."

But next month's Washington summit came in for criticism at an African summit Saturday by Benin's President Boni Yayi for excluding poor countries, which he described as "the main victims" of the meltdown.

On the heels of Beijing's meet, South American finance officials gathered Saturday to exchange views on how to keep the effects of the crisis at bay in the region, but host Brazil struck a somber tone.

"No one has an immediate solution. We are under no illusion that we will resolve all the problems," Brazil's Foreign Minister Celso Amorim told an emergency meeting of regional trade bloc Mercosur.

Stock markets provided a grim backdrop to the Beijing meeting, plummeting Friday after a raft of pessimistic corporate and economic news. Tokyo's dizzying 9.6 percent slump spilt over into Europe, where London's FTSE plunged 5.0 percent.

The Dow Jones Industrial Average slid 3.59 percent, capping a week when the US blue-chip index dropped more than five percent.

The Saudi stock market, the largest in the Arab world, began its trading week on Saturday with a nine percent plunge to sink to its lowest point in four years.

Giants of the auto, airline and technology industries took emergency action on Friday.

France's PSA Peugeot-Citroen and Renault ordered huge production cuts, while Japan's electronics giant Sony Corp. and Europe's biggest airline Air France-KLM issued profits warnings.

Chrysler LLC, the number three US automaker, said it would cut up to 5,000 white-collar jobs by the end of the year as prospects in the sector grow dimmer.

Britain's economy shrank by 0.5 percent in the three months to September compared with the previous quarter, official figures showed, marking the first contraction since 1992.

German Finance Minister Peer Steinbrueck predicted the financial crisis would last until late 2009 in an interview to be published Sunday.

"The risk of collapse is far from over," he told the Bild am Sonntag weekly.


Wall Street sees rocky road as Fed meeting looms (AFP)

Saturday, October 25th, 2008 | Finance News

Bruised and battered Wall Street faces another test in the coming week with more data to highlight dire economic conditions and a Federal Reserve meeting expected to offer a fresh rate cut.

A major question for investors is whether the horrific market action of recent weeks reflects worries of tougher economic conditions ahead or is the result of hedge funds and portfolio managers pulling out cash at any cost to meet redemptions.

In the week to Friday, the Dow Jones Industrial Average slid 5.35 percent to 8,378.95 and is now off a whopping 37 percent so far for 2008.

The broad-market Standard & Poor's 500 index retreated 6.78 percent to 876.77 and the technology-heavy Nasdaq composite plunged 9.3 percent on the week to 1,552.03.

In the coming week, the market will see a grim reminder of the economic woes with the first estimate of US gross domestic product for the third quarter and reports on durable goods orders and consumer confidence.

The Federal Reserve is widely expected to cut key interest rates further at its upcoming two-day meeting, hoping to offer a psychological boost to panic-stricken markets.

Joseph LaVorgna, economist at Deutsche Bank, said he expected a half-point cut that "should embolden some investors to take risk" that would help ailing markets.

"Hopefully, the combination of excess liquidity and government guarantees will encourage investors to extend further out on the money market curve," he said.

Some analysts argue that the stock market is being punished by portfolio managers forced to sell to pay clients pulling out their cash.

Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., said as many as 10,000 hedge funds with two trillion dollars in assets had been in the markets at their peak. But the size is magnified becuase many use borrowed funds to increase their assets by up to 30 to 40 times.

"Due to forced deleveraging, partly triggered by record-breaking redemption requests, hundreds of hedge funds are selling, sparking a fire sale on all sorts of investments," Sonders said.

John Wilson, equity strategist at Morgan Keegan, said he is advising clients to stay in the market.

"If you sell into this air pocket, I believe you run the risk of being the last seller," he said.

Gina Martin at Wachovia Securities argues the markets are being paralyzed by fear but also they are reflecting the economic turmoil.

"We are starting to acknowledge that we are probably going to have the worst recession in the United States in decades, and that is being acknowledged in equity prices," she said.

Nouriel Roubini, a New York University economist who has been warning for years of a deep crisis, said that "we have now reached a point where fundamentals and long-term valuation considerations do not matter any more for financial markets."

"What matters now is only flows -- rather than stocks and fundamentals -- and flows are unidirectional as everyone is selling and no one is buying as trying to buy equities is like catching a falling knife," Roubini said.

Gregory Drahuschak at Janney Montgomery Scott said that the markets may be glad to see an end to October, and that it could mean an end to the "forced selling that has ravaged equities for months."

Drahuschak said many portfolio managers face a trading deadline for liquidating shares and that this is driving the panic trades.

"The key date is October 28, which is the last regular settlement date that allows trades to be booked as October business," he said.

"In past years there has been a strong relationship between this time and the market moving up. This in part probably contributes to the seasonal effect that provides the market with a strong November and December."

Bonds rallied amid the renewed equity market turmoil in the week. The yield on the 10-year Treasury bond slumped to 3.697 percent from 3.938 percent a week earlier, and that on the 30-year bond eased to 4.087 percent against 4.137 percent. Bond yields and prices move in opposite directions.


Asia, Europe close ranks to ease financial crisis (Reuters)

Saturday, October 25th, 2008 | Finance News

Asian and European leaders closed ranks on Saturday to try to bolster confidence among investors who fear that a global credit crunch has ushered in a deep and damaging world recession.

The worst financial crisis in 80 years has forced countries to work together to find ways to help shore up a financial system crippled by banks fearful of lending to each other.

But with evidence mounting that Europe is already in recession, analysts fear that cooperation in shoring up banking systems could be threatened as governments begin to turn their attention to reviving domestic demand.

"We must use every means to prevent the financial crisis impacting growth of the real economy," Chinese Prime Minister Wen Jiabao said at the end of a two-day summit of 43 Asian and European leaders in Beijing.

Governments have pledged around $4 trillion to support banks and restart money markets to try to stem the crisis and are considering tougher financial rules to guard against any repeat.

Wen said countries needed to strike a balance between innovation and regulation and between savings and consumption.

"We need financial innovation, but we need financial oversight even more," he said, adding that China's priority was to spur domestic demand to ensure the country maintained fairly fast, steady growth.

U.S. President George W. Bush, who will host a global summit on the financial crisis next month, said in a radio address on Saturday: "While the specific solutions pursued by every country may not be the same, agreeing on a common set of principles will be an essential step toward preventing similar crises in the future."


In the Gulf, finance ministers and central bank governors said at a meeting on coordinating policy that they would look at directing more government funds into banks and regional stock markets, Al-Arabiya television reported.

Saudi Arabia, the United Arab Emirates and four other Gulf states have so far adopted separate responses to ease the pressures of the liquidity crunch on their banking sectors.

Qatar's finance minister, Youssef Kamal, said the crisis would give impetus to create regional monetary union and he was sure the measures taken to protect the economies were sufficient.

Any significant redirection of Gulf investment to domestic markets could be a concern for banks and other firms in the West which have eyed the huge sums in the region's state-run sovereign wealth funds as a potential source of capital while European and U.S. credit and share markets are seized up.

But the scarcity of private sector capital is being felt in the Gulf. Officials were set to discuss the risk of investments from countries hit by the crisis being "liquidated."

Saudi Arabian stocks plummeted 8.7 percent on fears of an oil price fall and recession.

It followed a sell-off in stocks from Tokyo to New York on Friday after private sector activity in the euro zone's economy contracted at the fastest pace in at least a decade and data showed Britain's economy shrank 0.5 percent in the third quarter -- much worse than economists expected.

"The danger of a collapse (on financial markets) is far from over. Any all-clear would be wrong," German Finance Minister Peer Steinbrueck said in an interview released on Saturday. "We are still in a dangerous situation," he told Bild am Sonntag newspaper.

French Economy Minister Christine Lagarde, asked in a TV interview how long the crisis would last, replied: "I think that 2009 will not be a good year."


Volatility has surged across financial markets and was particularly violent in foreign exchange trading on Friday, with a swathe of major and emerging market currencies sold aggressively in favor of the U.S. dollar and the Japanese yen.

Russian officials pledged on Saturday to prevent sharp fluctuations in the rouble, but said there was no need to limit capital movements or change the trading corridor of the currency, which hit two-year lows versus the dollar this week.

Russia runs a managed float of the rouble against a currency basket and the central bank has spent billions of dollars of its reserves -- the third largest in the world -- to keep the rouble's rate within a fixed corridor.

"Just because the global financial crisis has hit our shores does not mean that the rouble has to be significantly devalued," Alexei Ulyukaev, the first deputy chairman of the central bank, said in comments broadcast on Ekho Moskvy radio.

Emerging economies have been particularly hard hit by the crisis, forcing many to plunder their foreign exchange reserves to defend their currencies and financial systems.

Officials in Washington said those economies that qualify for a proposed new liquidity fund at the International Monetary Fund could be eligible for an unusually high level of funding.

Across Europe, banks have turned to government funds to ensure they could operate.

Belgian banking and insurance group KBC is seeking 3.5 billion euros from the government to boost capital, Le Soir daily reported.

In the United States, PNC Financial Services Group Inc agreed to purchase ailing Ohio-based National City Corp in a government-supported $5.6 billion deal that will create the No. 5 U.S. bank by deposits.

PNC was one of four regional banks that said they would receive cash infusions under a $250 billion bank recapitalization program, part of the U.S. Treasury's wider $700 billion financial services rescue package.

The Treasury, which has already committed half that sum to nine of the largest U.S. banks, was studying how it could give relief to bond and mortgage insurance firms under the program, two sources familiar with the deliberations said.

Examiners with the Federal Reserve have questioned Wall Street counterparties about their exposure to debt and other holdings of Citadel Investment Group, the Wall Street Journal reported on Saturday.

Citadel, one of the world's largest hedge funds, is seeking to stop rumors it was liquidating some portfolios after its two main funds had lost 35 percent since January.

(Reporting by Reuters bureaus worldwide; Editing by Mohammad Zargham)