Wednesday, 22 October 2008

Central banks act again, markets mixed

The Bank of Canada has cut interest rates again. Bloomberg reports:

The Bank of Canada reduced its main interest rate by a quarter of a point, less than economists predicted, saying it will probably need to act again to fend off the effects of a credit crisis and global recession.

Governor Mark Carney and his five deputies trimmed the target rate for overnight loans between commercial banks to 2.25 percent, the lowest since October 2004. Canada's six biggest banks passed the relief on to customers by lowering their prime rates to 4 percent. Canada's dollar fell to the lowest in more than three years as traders bet on more reductions in the central bank's benchmark.

Meanwhile, the Fed continues to come up with new initiatives to address the financial crisis. Reuters reports:

In the latest move to bolster credit availability, the U.S. Federal Reserve cooked up another program to complement its menu of cures for the credit markets.

On Tuesday, the U.S. central bank said it created a $540 billion funding facility that finances money market mutual funds' purchase of short-dated investments like certificates of deposit and commercial paper.

And credit markets are continuing to improve.

Three-month dollar Libor was set lower at 3.83375 percent, and the premium for these funds over Overnight Index Swap rates, the expected three-month rates on the Fed's policy target, fell to around 270 basis points, the narrowest in about three weeks.

Euro and sterling Libor rates and spreads also fell on Tuesday but at a slower pace.

Stocks mostly fell though, as Bloomberg reports.

U.S. stocks slid as companies from Texas Instruments Inc. to Freeport-McMoRan Copper & Gold Inc. reported profit and revenue that failed to meet analysts' estimates...

The Standard & Poor's 500 Index lost 30.35 points, or 3.1 percent, to 955.05. The Dow Jones Industrial Average tumbled 231.77, or 2.5 percent, to 9,033.66. The Nasdaq Composite Index decreased 73.35, or 4.1 percent, to 1,696.68. More than five stocks fell for each that rose on the New York Stock Exchange.

This is probably a timely reminder that despite the large falls in stock prices in recent weeks, the risk for equity investors is that prices have still not fully discounted the negative impact of the economic downturn on corporate earnings.

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