Wednesday, 21 January 2009

Stocks, sterling fall as BoC, BoE contemplate ZIRP

Investors didn't give the new US president much of a welcome on Tuesday. From Bloomberg:

U.S. stocks sank, sending the Dow Jones Industrial Average to its worst Inauguration Day decline, as speculation banks must raise more capital sent financial shares to an almost 14-year low.

State Street Corp., the largest money manager for institutions, tumbled 59 percent after unrealized bond losses almost doubled. Wells Fargo & Co. and Bank of America Corp. slumped more than 23 percent on an analyst’s prediction that they’ll need to take steps to shore up their balance sheets. The Dow’s 4 percent slide was the most on an Inauguration Day in the measure’s 112-year history, according to data compiled by Bloomberg and the Stock Trader’s Almanac...

The S&P 500 plunged 5.3 percent to 805.22. The S&P 500 Financials Index fell 17 percent to below its lowest closing level since March 1995 as concern European banks need more capital also weighed on the group. The Dow average slid 332.13 points to 7,949.09. Both the Dow and S&P 500 retreated to two- month lows.

Stock markets in Europe and Asia fell too.

Europe’s Dow Jones Stoxx 600 Index retreated 2.1 percent today, led by banks and technology companies... The MSCI Asia Pacific Index retreated 2.1 percent today.

ZIRP doesn't seem to have done much good for the US so far but Canada looks like it is going to try it out soon anyway. From Bloomberg:

The Bank of Canada slashed its key interest rate to the lowest since the institution was founded in 1934 and signaled that more cuts may be needed to jolt the economy out of recession and stabilize credit markets.

Governor Mark Carney cut the target rate on overnight loans between commercial banks by half a point to 1 percent, lower than the previous record of 1.12 percent in 1958 when the rate was based on treasury-bill yields. The move was anticipated by 19 of 20 economists surveyed by Bloomberg News.

The UK is a bit further behind as far as ZIRP is concerned, but that hasn't stop the BoE from talking about going beyond lowering interest rates. From Reuters:

The economy will likely shrink markedly in the first half of 2009 and policymakers need to think about using more than just interest rates to stimulate demand, Bank of England Governor Mervyn King said on Tuesday...

"With Bank Rate already at its lowest level in the Bank's history, it is sensible for the Monetary Policy Committee to prepare for the possibility -- and I stress we are not there yet -- that it may need to move beyond the conventional instrument of Bank Rate and consider a range of unconventional measures."

All this talk of monetary easing means that sterling has gotten a pounding. From Bloomberg:

The dollar advanced to $1.2873 per euro from $1.2904 late in New York yesterday. It reached $1.2845, the strongest since Dec. 9. Sterling weakened to $1.3871 from $1.3928. It touched $1.3811, the lowest since June 2001. Against the euro, the pound slid to 92.79 pence from 92.62 pence yesterday when it reached 93.25 pence, the lowest since Jan. 5.

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