Friday, 5 August 2011

Stocks plunge despite renewed action by policy-makers

After weeks of nervous trading, stock markets finally took the plunge literally on Thursday. From Bloomberg:

A global rout in equities drove the Standard & Poor’s 500 Index to its worst slump since February 2009, while two-year Treasury yields plunged to a record low amid concern the economy is weakening. The yen pared losses, recovering from the biggest drop versus the dollar since 2008 that was triggered by Japan selling its currency.

The S&P 500 tumbled 4.8 percent to 1,200.07 at 4 p.m. in New York with futures on the gauge slipping 0.2 percent as of 6:17 p.m. The S&P 500 has dropped 11 percent since July 22, the biggest loss over the same amount of time since March 2009. The MSCI All-Country World Index slid 4.1 percent as Brazil’s stocks slumped to a two-year low and Switzerland’s entered a bear market. Two-year yields declined as low as 0.25 percent. The yen sank 4.1 percent against the dollar before trimming its loss almost in half. Oil sank 5.8 percent to help the Thomson Reuters/Jefferies CRB Index of materials erase its 2011 gain.

The yen moves followed intervention action by the Japanese government earlier on Thursday. AFP/CNA reports:

Japan on Thursday intervened in currency markets to weaken the yen, the government said, in a bid to counter speculator-driven rises that had pushed the unit near its post-war high against the dollar...

Finance Minister Yoshihiko Noda confirmed that Japan intervened unilaterally in the foreign exchange market to counter what he called "one-sided" and "excessive" movements in the currency.

Also taking measures to boost the Japanese economy on Thursday was the BoJ. Again from AFP/CNA:

The Bank of Japan on Thursday said it would expand by 10 trillion yen a scheme to buy assets and boost liquidity to help safeguard the nation's post-quake recovery from the impact of a strong yen...

In what it described as a move to "enhance monetary easing", the BoJ will expand a 40 trillion yen ($511 billion) scheme to buy securities and supply funds by a further 10 trillion yen.

The bank's asset purchase fund, a key policy tool it uses to buy Japanese government bonds, corporate bonds and exchange traded funds, will be expanded to 15 trillion yen from 10 trillion yen.

It also boosted a credit facility by 5 trillion yen to 35 trillion...

The bank also said its board had voted unanimously to keep its key rate unchanged between zero and 0.1%.

Another central bank in the limelight on Thurday was the ECB. From Bloomberg:

European Central Bank President Jean- Claude Trichet said the ECB has resumed bond purchases and will offer banks more cash to stop the region’s debt crisis from engulfing Italy and Spain and hurting the economy.

“I wouldn’t be surprised that before the end of this teleconference you would see something on the market,” Trichet told reporters in Frankfurt today after the ECB kept its benchmark interest rate at 1.5 percent. “We were not unanimous but with overwhelming majority with regards to the bond purchases.”

Markets did not find Trichet's comments very assuring as those bond purchases apparently did not include Italian and Spanish bonds.

Italian and Spanish 10-year bonds declined, pushing the yields as high as 6.23 percent and 6.33 percent respectively. Irish and Portuguese bonds rose as people with knowledge of today’s transactions said the ECB bought those securities after being absent from the market for 18 weeks. That debt was at 10.4 percent and 11.3 percent as of 5 p.m. in London.

The euro slipped after Trichet’s comments, falling to $1.4161 at 6:37 p.m. in Frankfurt from $1.4202 at the start of the press conference.

The third major central bank meeting on Thursday concluded with less drama, the Bank of England leaving its interest rate and asset purchase programme unchanged.

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