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Monday 15 September 2008
Jittery road ahead for global markets
“After committing to JPMorgan and Bear and the involvement in Fannie Mae and Freddie Mac,” Peta said, “the government seems to have concluded: if you spare the rod, you spoil the investor.” More in comments... View PDF
By Floyd Norris and Vikas Bajaj Monday, September 15, 2008
Wall Street and the U.S. government played a game of chicken over the weekend, and neither side backed down, pushing Lehman Brothers toward bankruptcy and setting off worries of a worldwide sell-off as markets opened Monday.
While some fear a precipitous decline in the markets, others hoped that Bank of America’s surprise announcement Sunday that it was buying Merrill Lynch might provide enough reassurance to calm investors.
“That would be seen as very good news,” Liz Ann Sonders, the chief investment strategist for Charles Schwab & Co., said of Bank of America’s $50 billion or $29 a share offer, a price far higher than Merrill’s close Friday but less than a third of what the stock was worth early last year, before the mortgage crisis began to damage financial firms.
With major Asian markets in Japan, China and South Korea closed for a holiday Monday, the answer regarding investor response could wait until European markets open, and, after that, the American exchanges.
In the Lehman talks on Sunday, the U.S. government, worried about the precedents it had set in helping to rescue the investment bank Bear Stearns and the mortgage finance giants, Fannie Mae and Freddie Mac, wanted Wall Street to collectively take on the risk that Lehman’s assets were worth far less than the firm claimed. The firms, worried about their own capital, balked at doing so, though in the end they may take on some of the risk as Lehman’s investments are unwound.
Now, the risk for the financial firms is that investors would respond by trying to do exactly what they are trying to do — minimize their risk. If enough investors do that and choose to sell, stocks could plummet in markets worldwide, thus increasing the risks rather than easing them.
“We don’t want to be the first one in,” said Thomas Atteberry, a partner at First Pacific Advisors, an investment firm in Los Angeles specializing in fixed income. “I would rather wait and see that there are other participants in the marketplace.”
A bankruptcy filing could delay any immediate sell-off of some Lehman’s assets, although those pledged to secure loans might be quickly sold by lenders. The filing could also raise concerns that other firms will be badly damaged by their exposure to Lehman, which could lead to more selling pressure.
Sonders said that large-scale failures do not always lead to more carnage. “In the past when you had a crisis that resulted in a big failure, that ended up being closer to the bottom than anything else,” she said. “The problem is that we have waves of these. Where does it stop is the question that is different than in the past.”
Among some market participants, the wait on Sunday was excruciating. There was trading in credit default swaps — contracts that allow traders to buy or sell protection against a company defaulting on its debts, and there were few willing to sell such protection.
Instead, traders said, the cost of buying protection against defaults soared, even for financial firms that are considered to be in good shape, like Morgan Stanley and Goldman Sachs.
Some even recalled the stock market crash in 1987, the biggest fall ever seen by the current generation of Wall Streeters. “This is an earth-shattering event, this is like a tectonic plate shifting event,” said Thomas Priore, chief executive of Institutional Credit Partners, a hedge fund active in credit markets. “This is welcome back to Black Monday.”
That day, Oct. 19, 1987, had the Dow Jones industrial average fall more than 22 percent. It came after a week in which the index fell 9.5 percent, for the worst week since 1940, when France fell to invading German armies.
Over the weekend in 1987 before Black Monday, there was no sign of an integrated approach to the crisis, and even public bickering between American and European officials, which some argued exacerbated investor fears.
To some, talk of 1987 was overdone. “The market has already leaped ahead to the end game here,” said Douglas Peta, a market strategist at J. & W. Seligman & Co., a brokerage firm, saying that if an unwinding of Lehman’s assets went well, things might not be so bad on Monday.
Long term, he was not as optimistic. “We are in the grip of a vicious circle,” Peta said, “and the only thing that to me will break that is for home prices to stop going down.”
Over the weekend, the Federal Reserve Bank of New York called together the leaders of most major financial firms in an effort to get them to act collectively to stem any possible panic, but could not force a deal.
In a way, that was similar to what happened a little more than a century ago, when the financier J.P. Morgan called the heads of all the trust companies in New York to a meeting in his library, and demanded that they agree to put up money to stop the bank run at another trust company.
The bankers did not want to do so, in part because they would need that money if the panic spread. Morgan locked the door, and kept the presidents in the library until morning, when they finally gave in. No such coercion exists this year.
The major financial firms are in agreement that prices in many markets are ridiculously low. But they have repeatedly underestimated how much further prices could fall, particularly for mortgage-backed securities and derivatives tied to mortgage markets, and they have been surprised by how much capital they have been forced to raise.
In recent years, there was a general increase in leverage, whether among the Wall Street firms or people who bought homes with no money down. Now that is reversing.
“This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time,” Bill Gross of Pimco, a leading money manager, said in a newsletter on his Web site before the rescue of Fannie Mae and Freddie Mac. “Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.”
This year, every move by the government to shore up the financial system — from supporting the rescue of Bear Stearns to opening the Fed’s discount window to investment banks to last weekend’s move to rescue Fannie and Freddie — has produced rallies in hopes the problem was finally nearing an end. But new fears have soon arisen each time.
Now the government appears to have decided that it could not keep bailing out firm after firm, and to see how the markets will handle a bankruptcy, something it was unwilling to contemplate when it helped JPMorgan Chase take over Bear Stearns.
“After committing to JPMorgan and Bear and the involvement in Fannie Mae and Freddie Mac,” Peta said, “the government seems to have concluded: if you spare the rod, you spoil the investor.”
HONG KONG (Reuters) - Stocks and the U.S. dollar fell sharply on Monday after Lehman Brothers filed for bankruptcy protection, sending safe-haven Treasury debt and gold prices soaring as the financial system bent under severe pressure.
U.S. stock market futures were down around 3 percent, pointing to sharply lower open, while major European markets were set for falls of between 3.5 to 4 percent.
Rapid-fire developments on Wall Street, only a week after the U.S. government bailed out Fannie Mae and Freddie Mac, left some analysts literally speechless and sent shockwaves through almost every asset class. The dollar plunged 1.9 percent against the yen, on track for its biggest decline since February 2007, as investors' willingness to take risks evaporated.
"It's a pure flight to quality right now," said Adam Donaldson, head debt strategist at Australia's Commonwealth Bank.
"The big concern is how Lehman and other banks unwind their credit default contracts," he added. "Nobody knows how that will play out."
The price of insurance against default on debt soared, pushing up the iTRAXX Asia ex Japan high-yield index, a measure of credit market stress, to match record highs reached in the run-up to Bear Stearns' collapse in March.
While a lack of confidence felled Lehman, a lack of short-term funding was hurting one of the world's largest insurers American International Group . The firm was asking the Federal Reserve for a bridge loan of $40 billion (22.1 billion pounds), according to the New York Times, an unprecedented move that further battered the dollar and knocked down two-year U.S. government debt yields to a five-month low.
ASIAN STOCKS TUMBLE
Stock markets in Australia, Singapore and Taiwan all dropped 3 to 4 percent, Indian stocks fell 5 percent.
Holidays in most major Asian markets kept volume thin though price action belied a desire to seek safety first and ask questions later.
"The exact ramifications of the liquidation process and the unwinding of positions pertaining to the Lehman situation remain unclear. Hence, over the next 48 hours at least, financial markets are likely to be volatile and tense," said economists with United Overseas Bank in Singapore in a note.
The Swiss franc and yen, currencies associated with stability in times of duress, strengthened, especially against the dollar, which reeled as some in the market speculated the Federal Reserve may have to cut interest rates on Tuesday to shore up the economy from financial fallout.
The U.S. dollar dropped 1.9 percent against the yen at 105.88 yen and was off 1.2 percent against the Swiss franc to 1.1165 francs.
The euro rose by more than a cent against the dollar to $1.4380, up 1.1 percent from late Friday in New York.
In the spot market, gold rose 2 percent to $778.85 an ounce.
FED SUPPLIES LIQUIDITY, NOT CONFIDENCE
The Fed on Monday said it would begin accepting equities as collateral for emergency loans for the first time as it tried to ease the spiralling crisis. The steps would likely help surviving financial institutions to find cash but may not do much to boost global confidence in the U.S. financial system.
"The mere fact that they are forced to do this -- and they may still yet do some more -- indicates the breadth and depth of the trouble that the system is in," said V. Anantha Nageswaran, head of investment research, Asia-Pacific with Bank Julius Baer in Singapore.
In addition, 10 of the world's biggest banks agreed to establish a $70 billion borrowing facility to bolster liquidity.
U.S. Treasury yields, which move in the opposite direction of prices, fell sharply in early Asian trade on Monday and 3-month eurodollar futures surged as dealers priced in the possibility of lower Federal Reserve benchmark interest rates.
The yield on the policy-sensitive two-year Treasury note hit a five-month low of 1.90 percent. The 10-year yield was also at the lowest since April, at 3.52 percent compared with 3.72 percent late on Friday.
Bank of America said it would acquire Merrill Lynch for $50 billion in yet another development that realigned Wall Street. The deal was significant not just because of its price but it showed how the private sector will have to sort itself out and not depend on backing of the U.S. government.
"For many, but not all, this is an impossible lesson to learn in the middle of the worst financial storm since the Great Depression," said Alan Ruskin, chief international strategist with RBS Greenwich in Greenwich, Connecticut.
Australia's benchmark S&P/ASX 200 index fell 1.8 percent, weighed by shares of the country's top banks such as Commonwealth Bank of Australia and Macquarie Group .
Taiwan's TAIEX , the only stock market open in north Asia, dropped 4.1 percent to the lowest since November 2005.
Singapore's Straits Times index was at the lowest since September 2006, down 2.9 percent.
"The financial sector in the region is very volatile now and we don't expect investors' confidence to recover quickly in just a few days or one week," said Alex Huang, a vice president at Taiwan's Mega International Securities.
While the fate of the U.S. financial system loomed in investors' minds around the world, initial reports that Hurricane Ike had not severely damaged infrastructure in Texas knocked benchmark oil prices fall to a six-month low below $99 a barrel.
Oil fell $2.10 to $99.08 a barrel after falling as low as $98.46 -- the lowest since February 26 -- adding to a steady downward trend in prices since mid-July's peak of over $147 a barrel as evidence mounts that high energy costs and a weakening economy are cutting into fuel consumption.
2 comments:
Jittery road ahead for global markets
By Floyd Norris and Vikas Bajaj
Monday, September 15, 2008
Wall Street and the U.S. government played a game of chicken over the weekend, and neither side backed down, pushing Lehman Brothers toward bankruptcy and setting off worries of a worldwide sell-off as markets opened Monday.
While some fear a precipitous decline in the markets, others hoped that Bank of America’s surprise announcement Sunday that it was buying Merrill Lynch might provide enough reassurance to calm investors.
“That would be seen as very good news,” Liz Ann Sonders, the chief investment strategist for Charles Schwab & Co., said of Bank of America’s $50 billion or $29 a share offer, a price far higher than Merrill’s close Friday but less than a third of what the stock was worth early last year, before the mortgage crisis began to damage financial firms.
With major Asian markets in Japan, China and South Korea closed for a holiday Monday, the answer regarding investor response could wait until European markets open, and, after that, the American exchanges.
In the Lehman talks on Sunday, the U.S. government, worried about the precedents it had set in helping to rescue the investment bank Bear Stearns and the mortgage finance giants, Fannie Mae and Freddie Mac, wanted Wall Street to collectively take on the risk that Lehman’s assets were worth far less than the firm claimed. The firms, worried about their own capital, balked at doing so, though in the end they may take on some of the risk as Lehman’s investments are unwound.
Now, the risk for the financial firms is that investors would respond by trying to do exactly what they are trying to do — minimize their risk. If enough investors do that and choose to sell, stocks could plummet in markets worldwide, thus increasing the risks rather than easing them.
“We don’t want to be the first one in,” said Thomas Atteberry, a partner at First Pacific Advisors, an investment firm in Los Angeles specializing in fixed income. “I would rather wait and see that there are other participants in the marketplace.”
A bankruptcy filing could delay any immediate sell-off of some Lehman’s assets, although those pledged to secure loans might be quickly sold by lenders. The filing could also raise concerns that other firms will be badly damaged by their exposure to Lehman, which could lead to more selling pressure.
Sonders said that large-scale failures do not always lead to more carnage. “In the past when you had a crisis that resulted in a big failure, that ended up being closer to the bottom than anything else,” she said. “The problem is that we have waves of these. Where does it stop is the question that is different than in the past.”
Among some market participants, the wait on Sunday was excruciating. There was trading in credit default swaps — contracts that allow traders to buy or sell protection against a company defaulting on its debts, and there were few willing to sell such protection.
Instead, traders said, the cost of buying protection against defaults soared, even for financial firms that are considered to be in good shape, like Morgan Stanley and Goldman Sachs.
Some even recalled the stock market crash in 1987, the biggest fall ever seen by the current generation of Wall Streeters. “This is an earth-shattering event, this is like a tectonic plate shifting event,” said Thomas Priore, chief executive of Institutional Credit Partners, a hedge fund active in credit markets. “This is welcome back to Black Monday.”
That day, Oct. 19, 1987, had the Dow Jones industrial average fall more than 22 percent. It came after a week in which the index fell 9.5 percent, for the worst week since 1940, when France fell to invading German armies.
Over the weekend in 1987 before Black Monday, there was no sign of an integrated approach to the crisis, and even public bickering between American and European officials, which some argued exacerbated investor fears.
To some, talk of 1987 was overdone. “The market has already leaped ahead to the end game here,” said Douglas Peta, a market strategist at J. & W. Seligman & Co., a brokerage firm, saying that if an unwinding of Lehman’s assets went well, things might not be so bad on Monday.
Long term, he was not as optimistic. “We are in the grip of a vicious circle,” Peta said, “and the only thing that to me will break that is for home prices to stop going down.”
Over the weekend, the Federal Reserve Bank of New York called together the leaders of most major financial firms in an effort to get them to act collectively to stem any possible panic, but could not force a deal.
In a way, that was similar to what happened a little more than a century ago, when the financier J.P. Morgan called the heads of all the trust companies in New York to a meeting in his library, and demanded that they agree to put up money to stop the bank run at another trust company.
The bankers did not want to do so, in part because they would need that money if the panic spread. Morgan locked the door, and kept the presidents in the library until morning, when they finally gave in. No such coercion exists this year.
The major financial firms are in agreement that prices in many markets are ridiculously low. But they have repeatedly underestimated how much further prices could fall, particularly for mortgage-backed securities and derivatives tied to mortgage markets, and they have been surprised by how much capital they have been forced to raise.
In recent years, there was a general increase in leverage, whether among the Wall Street firms or people who bought homes with no money down. Now that is reversing.
“This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time,” Bill Gross of Pimco, a leading money manager, said in a newsletter on his Web site before the rescue of Fannie Mae and Freddie Mac. “Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.”
This year, every move by the government to shore up the financial system — from supporting the rescue of Bear Stearns to opening the Fed’s discount window to investment banks to last weekend’s move to rescue Fannie and Freddie — has produced rallies in hopes the problem was finally nearing an end. But new fears have soon arisen each time.
Now the government appears to have decided that it could not keep bailing out firm after firm, and to see how the markets will handle a bankruptcy, something it was unwilling to contemplate when it helped JPMorgan Chase take over Bear Stearns.
“After committing to JPMorgan and Bear and the involvement in Fannie Mae and Freddie Mac,” Peta said, “the government seems to have concluded: if you spare the rod, you spoil the investor.”
Financial havoc wallops U.S. dollar and stocks
By Kevin Plumberg
Monday, September 15, 2008
HONG KONG (Reuters) - Stocks and the U.S. dollar fell sharply on Monday after Lehman Brothers filed for bankruptcy protection, sending safe-haven Treasury debt and gold prices soaring as the financial system bent under severe pressure.
U.S. stock market futures were down around 3 percent, pointing to sharply lower open, while major European markets were set for falls of between 3.5 to 4 percent.
Rapid-fire developments on Wall Street, only a week after the U.S. government bailed out Fannie Mae and Freddie Mac, left some analysts literally speechless and sent shockwaves through almost every asset class. The dollar plunged 1.9 percent against the yen, on track for its biggest decline since February 2007, as investors' willingness to take risks evaporated.
"It's a pure flight to quality right now," said Adam Donaldson, head debt strategist at Australia's Commonwealth Bank.
"The big concern is how Lehman and other banks unwind their credit default contracts," he added. "Nobody knows how that will play out."
The price of insurance against default on debt soared, pushing up the iTRAXX Asia ex Japan high-yield index, a measure of credit market stress, to match record highs reached in the run-up to Bear Stearns' collapse in March.
While a lack of confidence felled Lehman, a lack of short-term funding was hurting one of the world's largest insurers American International Group . The firm was asking the Federal Reserve for a bridge loan of $40 billion (22.1 billion pounds), according to the New York Times, an unprecedented move that further battered the dollar and knocked down two-year U.S. government debt yields to a five-month low.
ASIAN STOCKS TUMBLE
Stock markets in Australia, Singapore and Taiwan all dropped 3 to 4 percent, Indian stocks fell 5 percent.
Holidays in most major Asian markets kept volume thin though price action belied a desire to seek safety first and ask questions later.
"The exact ramifications of the liquidation process and the unwinding of positions pertaining to the Lehman situation remain unclear. Hence, over the next 48 hours at least, financial markets are likely to be volatile and tense," said economists with United Overseas Bank in Singapore in a note.
The Swiss franc and yen, currencies associated with stability in times of duress, strengthened, especially against the dollar, which reeled as some in the market speculated the Federal Reserve may have to cut interest rates on Tuesday to shore up the economy from financial fallout.
The U.S. dollar dropped 1.9 percent against the yen at 105.88 yen and was off 1.2 percent against the Swiss franc to 1.1165 francs.
The euro rose by more than a cent against the dollar to $1.4380, up 1.1 percent from late Friday in New York.
In the spot market, gold rose 2 percent to $778.85 an ounce.
FED SUPPLIES LIQUIDITY, NOT CONFIDENCE
The Fed on Monday said it would begin accepting equities as collateral for emergency loans for the first time as it tried to ease the spiralling crisis. The steps would likely help surviving financial institutions to find cash but may not do much to boost global confidence in the U.S. financial system.
"The mere fact that they are forced to do this -- and they may still yet do some more -- indicates the breadth and depth of the trouble that the system is in," said V. Anantha Nageswaran, head of investment research, Asia-Pacific with Bank Julius Baer in Singapore.
In addition, 10 of the world's biggest banks agreed to establish a $70 billion borrowing facility to bolster liquidity.
U.S. Treasury yields, which move in the opposite direction of prices, fell sharply in early Asian trade on Monday and 3-month eurodollar futures surged as dealers priced in the possibility of lower Federal Reserve benchmark interest rates.
The yield on the policy-sensitive two-year Treasury note hit a five-month low of 1.90 percent. The 10-year yield was also at the lowest since April, at 3.52 percent compared with 3.72 percent late on Friday.
Bank of America said it would acquire Merrill Lynch for $50 billion in yet another development that realigned Wall Street. The deal was significant not just because of its price but it showed how the private sector will have to sort itself out and not depend on backing of the U.S. government.
"For many, but not all, this is an impossible lesson to learn in the middle of the worst financial storm since the Great Depression," said Alan Ruskin, chief international strategist with RBS Greenwich in Greenwich, Connecticut.
Australia's benchmark S&P/ASX 200 index fell 1.8 percent, weighed by shares of the country's top banks such as Commonwealth Bank of Australia and Macquarie Group .
Taiwan's TAIEX , the only stock market open in north Asia, dropped 4.1 percent to the lowest since November 2005.
Singapore's Straits Times index was at the lowest since September 2006, down 2.9 percent.
"The financial sector in the region is very volatile now and we don't expect investors' confidence to recover quickly in just a few days or one week," said Alex Huang, a vice president at Taiwan's Mega International Securities.
While the fate of the U.S. financial system loomed in investors' minds around the world, initial reports that Hurricane Ike had not severely damaged infrastructure in Texas knocked benchmark oil prices fall to a six-month low below $99 a barrel.
Oil fell $2.10 to $99.08 a barrel after falling as low as $98.46 -- the lowest since February 26 -- adding to a steady downward trend in prices since mid-July's peak of over $147 a barrel as evidence mounts that high energy costs and a weakening economy are cutting into fuel consumption.
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