Monetary tightening cycle near end, stock markets plunge

Reuters reports that the global monetary tightening cycle is near an end.

A raft of central bank interest rate decisions on Thursday reinforced investor opinion that the international rates cycle had peaked, with growth risks starting to outweigh the inflation worries of policymakers.

The European Central and Bank of England both held interest rates steady while Sweden's Riksbank and Indonesia's central bank both raised rates by 25 basis points in moves that analysts said were likely to be their last upward tweaks in 2008.

But the ECB did perform another sort of tightening. From Bloomberg:

European Central Bank President Jean- Claude Trichet made it harder for financial institutions stung by the year-long credit crisis to exploit its lending rules.

Trichet said he'll make it more expensive for banks to borrow from the ECB against most asset-based securities from Feb. 1. The ECB will increase the so-called `haircut' on the securities to 12 percent from as little as 2 percent, meaning it will lend just 88 percent of the value of the paper. Paper without a market price faces an additional 4.4 percent discount.

That didn't help investor sentiment. From Bloomberg:

The Stoxx 600 lost 2.6 percent to 278.18, the steepest drop since July 11, as the ECB and the Bank of England kept borrowing costs on hold. The measure is down 24 percent this year as the global economy cooled and financial firms posted writedowns and credit-related losses of more than $500 billion.

Neither did news on the economy.

German factory orders unexpectedly fell 1.7 percent in July, extending their longest ever declining streak and increasing the likelihood that Europe's largest economy is heading for a recession...

It was, if anything, worse for US stock markets. Again from Bloomberg:

The S&P 500 dropped for a fourth day, decreasing 38.15 points, or 3 percent, to 1,236.83, sinking the most since June 6. The Dow Jones Industrial Average lost 344.65, or 3 percent, to 11,188.23. The Nasdaq Composite Index slipped 74.69, or 3.2 percent, to 2,259.04. Eleven stocks fell for each that rose on the New York Stock Exchange.

But Thursday's US economic data yesterday weren't too bad. Bloomberg reports:

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 50.6...

Initial jobless claims rose to 444,000 in the week ended Aug. 30, while the number of Americans continuing to collect benefits increased to 3.435 million in the prior week, the Labor Department said in Washington. A private report indicated separately that U.S. companies cut 33,000 jobs in August...

ADP Employer Services said the 33,000 decline in private payrolls followed a revised gain of 1,000 for the prior month that was lower than previously estimated.

Maybe what financial markets need is a bailout. Bill Gross thinks so anyway.

[S]ystematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami... We, as well as our SWF and central bank counterparts, are reluctant to make additional commitments...

... [I]f we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.