So much for the idea that the bailout bill would produce a relief rally. Overseas equity markets are taking a beating. No word yet on how the credit markets are faring.
Investors are finally waking up to the notion that it isn’t just the US financial system that is in trouble, but that pretty much every advanced economy (save Japan, although Canada has yet to produce any bad headlines) has a banking system in not-so-good health. And economies that may indeed have sound banks will nevertheless be pulled down by the large number of institutions in their trading partners that are afflicted.
Update 5:30 AM; The reaction seems to be worsening as trading moves west. The FTSE is down 5%; Dow futures, however, are still down 220ish points. MacroMan is relatively sanguine:
The market’s vote of no confidence in Europe has been more acutely observed in the currency market, where recent EUR/USD resembles nothing so much as a band of lemmings jumping off a cliff. Was it really only two weeks ago that EUR/USD had its biggest daily gain in the nearly ten-year history of the single currency?…
So global equities are a sea of red, but as of yet today’s weakness is relatively controlled; there’s no sense of panic. Macro Man cannot help but think that risks of a global, coordinated rate cut have risen substantially, particularly after the ECB left the door open for an intra-meeting cut last week. It is perhaps this possibility that has kept today’s European sell-off relatively orderly. As suggested last week, the front end of Europe has firmed, with the Schatz future trading up nearly half a point from Friday’s settlement price.
From Bloomberg:
Stocks tumbled around the world, the euro fell to a 13-month low against the dollar and oil dropped below $90 a barrel as the year-long credit market seizure caused bank bailouts to spread through Europe. Government bonds rallied.
Russia’s Micex Index fell 12 percent, leading declines among benchmark stock indexes. BHP Billiton Ltd. slid 8.9 percent and UBS AG lost 8.6 percent as commodities producers and banks dropped the most in the MSCI World Index. The gauge of 23 developed countries is down 30 percent this year, the worst annual performance since at least 1970.
The euro weakened more than 1 percent against the dollar after the German government and state banks were forced to pledge $68 billion to rescue Hypo Real Estate Holding AG. Crude dropped 39 percent from its record on July 11 as the global economy slows. Investors seeking the safety of government bonds pushed yields on two-year Treasury notes to 1.5 percent, 50 basis points below the Federal Reserve’s main interest rate.
“It’s like a fire,” said Emmanuel Soupre, a fund manager at Neuflize OBC Asset Management in Paris, which oversees the equivalent of $33 billion. “It’s easier to extinguish five minutes after the start. Now we’re about an hour into it. We have to act quickly to assure the continuity of the financial system to avoid an irreversible contamination of the entire economy.”
The MSCI World Index lost 2.5 percent to 1,110.21 at 9:35 a.m. in London as all 10 industry groups decreased. National markets in China, Germany, France, Japan, South Korea and the U.K. fell more than 4 percent.
Europe’s Dow Jones Stoxx 600 Index sank 4.1 percent as BNP Paribas SA said it will take control of Fortis in Belgium and Luxembourg. The MSCI Asia Pacific Index lost 4.4 percent. Futures on the Standard & Poor’s 500 Index slipped 2.1 percent, as JPMorgan Chase & Co., the biggest U.S. bank by deposits, fell 5.1 percent
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From the Wall Street Journal, on Asian markets:
Asian stock markets plunged Monday as investors shrugged off a U.S. bank bailout and focused instead on deepening financial turmoil in Europe.
Tokyo’s Nikkei 225 Index hit its lowest level in more than four years, falling 4.3% to close at 10473.09. The Topix index of all the Tokyo Stock Exchange First Section issues fell 4.7% to 999.05.
Worries that the financial crisis is spreading to Europe and around the globe sparked concerns over global growth, overwhelming any relief from the U.S. House of Representatives’ passage of a $700 billion bank bailout Friday. Analysts say it is still unclear how quickly the rescue package will unfreeze credit markets and shore up the U.S. economy, a vital export market for Japan.
“We haven’t seen any positive developments in Europe or the U.S., apart from the rescue plan,” said Alex Tang, head of research at brokerage Core Pacific-Yamaichi in Hong Kong. “But even with the rescue plan, investors are focused on the slowing economy.”
Traders were spooked by Germany’s announcement Sunday of a new bailout package totaling €50 billion ($69 billion) for Hypo Real Estate, the country’s second-biggest commercial property lender, part of a scramble by European governments to save failing banks.
And the Journal on the morning action in Europe:
European shares fell sharply at the open on Monday after renewed turmoil in the financial sector over the weekend heightened anxiety over the state of the global economy.
Early Monday, the Dow Jones Stoxx 600 Index was down 3.9% at 251.20. The U.K.’s FTSE 100 Index was 4.5% lower at 4754.55, while France’s CAC-40 Index lost 4.5% to 3898.74. Germany’s DAX Index plummeted 4.3% to 5547.98….
“We now believe national recessions in the U.S. and the U.K. will be deeper and longer than previously forecast,” said Larry Hatheway, an economist at UBS in London. “For the first time, we also anticipate recession in the euro zone.”
Signs of a deepening European financial crisis continued to emerge. European leaders over the weekend vowed to restore confidence in the markets and to back the bloc’s banks, but failed to come up with a EU-wide response to the financial turmoil.
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“So much for the idea that the bailout bill would produce a relief rally.” — Yves Smith
Mind meld! Exactly what was I gonna type. But it’s already there.
After the eye of the financial hurricane passes over, the question for researchers (don’t say “economists;” except for Roubini and a handful of others, they obviously didn’t have a frickin’ clue) will be: to what extent did the death throes of Bretton Woods II propagate the ‘bank-wasting disease’ worldwide?
I say, you don’t need no PhD Econ to figure this out. As the “reserve currency country,” the US spewed dollars across the globe for decades … and spewed them even faster during wars (Iraq, Afghanistan, etc.). Foreigners had to recycle them at a massive rate. Many went into Treasurys and agencies, keeping US interest rates artificially lower — and the dollar’s external purchasing power artificially higher — than it would otherwise have been. Thus, US trade and current account deficits had a self-reinforcing aspect.
But some foreigners, especially the private sector such as European banks which had to meet earnings targets, took the sucker bait of securitized mortgages with “triple A” ratings from … well, from a bunch of 20-something MBA trainees — LOL! In parallel, all the non-sterilized dollar monetization overseas produced local currency real estate Bubbles across Europe and elsewhere.
Bottom line: Mad Al bubbled the whole frickin’ world; Weimar Ben is pumping furiously to eclipse his record and garner the coveted title, Sir John Law III.
$700 billion, $700 trillion — it’s only paper money. I hear Weimar had some sublime parties, svelte flappers and sweet narcotics during its heady final days of hyperinflationary insanity. Rock on, Benny — party till the purple dawn; till the rosy glow of cities on flame smudges the horizon.
— Juan Falcone (from Bellevue psych ward)
TARP will provide a rally (perhaps not measured by equity indexes) to partners at GS and MS and BlackRock and PIMCO. Perhaps C and BAC executives might get some of the drippings.
It’s ironic but Larry Fink was one of the midwives of the tranche securtization. That flaws in that securitization methodology have been apparent for 25 years (witness the fact that the users of that technique no longer exist or no longer independent: First Boston, Salomon Brothers, Kidder Peabody, Donaldson Lufkin Jenrette).
Now, he will help himself to a portion of $700 billion of taxpayer money.
‘Who cares for you?’ said Alice, ‘You’re nothing but a pack of cards!’
We’re all in the process of waking up now.
At this point, the world’s ministers of finance are fighting two battles, which can approximately be represented by the credit and equity markets. The battle that has grabbed the headlines for the last two weeks is to stabilize the financial system and get the credit markets working. The second battle, however, is the old-fashioned one of turning around a recessionary economy. Equity markets for the most part reflect people’s fears about the length and depth of the recession, and ironically the more attention the first battle gets, the worse the second problem becomes (because as people read all these headlines, they start cutting back on spending).
For a set of proposals that governments can take to fight both of these battles, see http://baselinescenario.com/baseline-scenario-10608-proposals/.
Market action today reminds me of an old John Kenneth Galbraith homily…
‘The only function of economic forecasting is to make astrology look respectable’
Or…
‘There is something wonderful in seeing a wrong-headed majority assailed by truth’ JKB
Canada has yet to produce any bad headlines…
Interesting phrasing. Should I be putting my loonies in a sock?