There are some very nervous bankers and others in the financial world awaiting the approval of the $US700 billion bailout from the US Congress and Government.
Amid uncertainty about the plan’s prospects, US cash funds and banks stampeded to safety, buying short-term government debt, selling commercial paper and withdrawing funds from the interbank market. As a result, the rates that banks charge each other soared, while yields on short-term Treasury bills plunged.
Now it seems the plan is headed for approval with: it has to be signed off by the rest of the two parties’ representatives, US Treasury and other regulators.
Republicans are refusing to agree to the scope and direction of the legislation and this could defeat it as Democrats say they won’t pass it without substantial Republican support.
President Bush held a meeting with Barack Obama and John McCain and others at the White House.
The legislation will go to the US House of Representatives tonight, our time, and the US Senate will meet on Saturday to debate and approve it.
But it needs consensus, and if that’s not apparent, then trading will be fraught tonight.
Wall Street kicked higher in anticipation; up 300 points at one stage, then down sharply, before rising at the end to be up nearly 200 points on the Dow. It closed before signs of a lack of agreement emerged in Washington.
Financial stocks rose 2.6% and were among the biggest gainers on hopes that the plan would unlock frozen money markets.
GE rose 4.4% even after the world’s fourth-largest company cut its third-quarter and full-year earnings forecast and suspended a share buy-back. It was GE’s the second earnings downgrade this year.
Escaping the bullish momentum, Washington Mutual, America’s biggest savings and loan plunged 25% to just $US1.69 on reports that regulators were struggling to broker the takeover of the company.
Oil rose, the US dollar was stronger (and the Aussie was back around 83.60 US cents) and gold weakened. US Treasury bond yields rose on the news.
Figures were released showing another sharp slump in new US home sales and industrial production. It was a reminder that the real problems remain and won’t be touched by the bailout plan.
Stockmarkets in Asia fell, especially in Japan and Australia, thought China’s were higher.
Stocks in Europe were up in early trading and finished higher, with gains in the UK, France and London as news spread of the broad agreement on the bailout.
Money market rates in Asia’s biggest financial centres jumped on concern that the US Congress might hold up or water down the Treasury Department’s plan to bail out the financial system (or at least try to).
A cash freeze has gripped world financial markets as fearful banks hoard billions and billions of dollars and prefer to leave it on deposit with central banks and earn less than they could get from lending it to normal business and personal customers.
Not even Australia is exempt: our well capitalised banks were following suit and sitting on billions of dollars.
Banks around the world are refusing to deal with each other, or anyone else, so they are leaving tens of billions of dollars on deposit with central banks.
The drought has worsened significantly since the collapse of Lehman Brothers 10 days ago and still rising losses taken by bond holders and other investors.
Bank nervousness seems to have picked up from earlier this week as the progress of the US bailout proposal slows in the Congress.
If that proposal was to fail, markets would dry up and if there was to be a reason why the global economies slumps into recession or worse, it would be this cash drought. The money’s there, tucked away in cash management accounts and at central banks, but no one is willing to lend. There is no shortage of borrowers.
Central banks in the UK and Australia moved this week to try and ease the drought by moving to mop up the cash.
The drought has seen short term interest rates around the world rise sharply as banks choose to leave their money with the central bank, or invest in short term US Government treasury notes as the ultimate short-term safe haven.
Short term US treasury note rates have again fallen under 1% while short term US dollar (and some other currency) LIBOR rates in London has jumped sharply to levels seen in the dark days of early January.
The three-month US Treasury bill traded at 0.49% in New York overnight, down from 0.79% at the close Tuesday and 0.88% on Monday.
The demand for short term, security can be seen from the results of a huge US Treasury auction of $US34 billion in two-year bonds: demand was about normal for the moment at 2.2 times the amount offered. Market yields for the notes traded down to 2.02%,
In Australia yields on 90 day bank kills, the key short term funding source in the country, have risen to where they are higher currently than 180 day bills. It is normally the other way around. Spikes like we are seeing are signs of a cash shortage.
A cash freeze has gripped world financial markets as fearful banks hoard billions and billions of dollars and prefer to leave it on deposit with central banks and earn less than they could get from lending it to normal business and personal customers.
Not even Australia is exempt: our well capitalised banks are following suit
Banks around the world are refusing to deal with each other, or anyone else, so they are leaving tens of billions of dollars on deposit with central banks around the world.
The drought has worsened significantly since the collapse of Lehman Brothers 10 days ago and still rising losses taken by bond holders and other investors.
Bank nervousness seems to have picked up from earlier this week as the progress of the US bailout proposal slows in the Congress.
If that proposal was to fail, markets would dry up and if there was to be a reason why the global economies slumps into recession or worse, it would be this cash drought. The money’s there, tucked away in cash management accounts and at central banks, but no one is willing to lend. There is no shortage of borrowers.
Central banks in the UK and Australia have moved within the past 24 hours to try and ease the drought by moving to mop up the cash.
The drought has seen short term interest rates around the world rise sharply as banks choose to leave their money with the central bank, or invest in short term US Government treasury notes as the ultimate short-term safe haven.
Short term US treasury note rates again fell under 1% while short term US dollar (and some other currency) LIBOR rates in London has jumped sharply to levels seen in the dark days of early January.
The three-month US Treasury bill traded at 0.49% in New York overnight, down from 0.79% at the close Tuesday and 0.88% on Monday.
The demand for short term, security can be seen from the results of a huge US Treasury auction of $US34 billion in two-year bonds: demand was about normal for the moment at 2.2 times the amount offered. Market yields for the notes traded down to 2.02%,
In Australia yields on 90 day bank kills, the key short term funding source in the country, have risen to where they are higher currently than 180 day bills. It is normally the other way around. Spikes like we are seeing are signs of a cash shortage.
Three-month interbank offered rates in Hong Kong and Singapore have risen sharply as well (Hong Kong has just had a run on the Bank of East Asia on Wednesday, which frightened the market there).
Dealers said the three month rates (90 days) jumped past the levels when Lehman Brothers filed for bankruptcy and the U.S. government nationalized American International Group last week.
Three-month rates on yen loans rose to a two-month high and bill swap rates in Australia soared to the highest since August.
In China however, shares rose to a three-week high yesterday as parent companies continued to buy back shares of their listed subsidiaries after the central government made that move easier as a way of helping stop the market slump.
In Australia, banks kept $6.9 billion in their exchange settlement accounts instead of using it to lend to one another. That was the highest amount kept in the ESA at the Reserve Bank since the credit crunch started and it’s a sign the banks are fearful of liquidity risk, even with one another.
And from Japan a nasty warning about the global slowdown.
Japan’s trade account dropped into a surprise deficit in August as high oil prices pushed up import costs, but more importantly, exports slowed to a trickle.
Apart from January, which usually sees low levels of exports because of factory closures, it was the first monthly deficit since 1982, when Japan was reeling from the aftermath of the second oil crisis.
But, more important was the bad news from the export account.
Shipments to the United States had their sharpest fall ever from the same month a year earlier.
Exports rose 0.3% in August from August 2007, compared to a forecast of a rise of 2.4%.
Japan’s exports to the United States fell a record 21.8% last month, marking the 12th straight month of annual declines, on sluggish shipments of automobiles and consumer electronics.
Exports to the European Union fell for the third month in four.
A 6.7% rise in shipments to Asia and an 8.8% rise in exports to Japan’s new number one destination, China (for the second month in a row), couldn’t offset the slump in exports to the US and Europe.
Japan’s economy contracted in the second quarter at its sharpest rate in seven years thanks to slowing demand from the US and Europe and there are growing fears that it will shrink this quarter to put the country into a proper recession.
And major car companies, Toyota and Honda chopped back car production and exports in Japan and in the US and Europe in response to the slow down. Toyota’s global output was cut by a substantial 17%.
