Friday, 10 October 2008

Credit markets remain stressed, US stocks plunge

It turns out that the coordinated rate cuts aren't helping markets very much. From Bloomberg:

The cost of borrowing in dollars for three months in London soared to the highest level this year as coordinated interest-rate reductions worldwide failed to revive lending among banks for any longer than a day...

The London interbank offered rate, or Libor, for three-month loans rose to 4.75 percent today, the highest level since Dec. 28... The overnight rate fell to 5.09 percent, still 359 basis points more than the Fed's 1.5 percent target rate...

The Libor-OIS spread, the difference between the three-month dollar Libor and the overnight indexed swap rate, climbed 23 basis points to an all-time high of 348 basis points. The average was 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, exceeded 400 basis points for a second day.

US stocks took another pummelling on Thursday. Bloomberg reports:

U.S. stocks slid and the Dow Jones Industrial Average fell below 9,000 for the first time since 2003 as higher borrowing costs and slower consumer spending spurred concern carmakers, insurers and energy companies will be the next victims of the credit crisis...

The Standard & Poor's 500 Index retreated for a seventh day, losing 75.02 points, or 7.6 percent, to 909.92 to cap its longest streak of daily declines since 1996. The Dow Jones Industrial Average declined 678.91, or 7.3 percent, to 8,579.19. The Nasdaq Composite Index decreased 5.5 percent to 1,645.12. Twenty stocks fell for each that rose on the New York Stock Exchange.

And the forex market's key measure of risk aversion, the Japanese yen, soared. Again from Bloomberg:

The yen rose against the dollar, headed for its biggest weekly gain in a decade, on speculation a global stock market rout will prompt investors to pare holdings of higher-yielding assets funded with the Japanese currency...

The yen rose to 98.90 per dollar at 8:49 a.m. in Tokyo from 99.82 late yesterday in New York, headed for a 6.5 percent gain this week. It earlier touched 98.51, the strongest since March 20. Japan's currency was at 135.04 versus the euro from 135.83 yesterday and 145.11 at the end of last week. It earlier touched 134.02, the strongest since August 2005. The euro fell to $1.3559 from $1.3604, on course for its second weekly decline.

The financial markets are clearly in turmoil. But if traders are feeling too stressed out from it all, perhaps they should follow the advice of Iceland's prime minister. From Bloomberg:

Iceland Prime Minister Geir Haarde has some advice for his fellow citizens after the country's banking system imploded: Go fishing.

"We are too small a country to sustain such a big banking system," he said in an interview. "We have fantastic resources and an abundance of green energy and we will now utilize that and the other resources we have, the ocean and human capital."

The advice came a bit late for Iceland.

Over the past decade, Iceland's banks backed a buying binge that saw local investors take stakes in retailers such as Saks Fifth Avenue, jeweler Mappin & Webb, and the parent of American Airlines, while the nation's banks snapped up financial services firms abroad. That foreign adventure came to an end this week with the government seizure of Iceland's top three banks, including Kaupthing Bank hf, the nation's biggest lender.

The good news for Iceland is that it isn't going to have Zimbabwe's inflation rate, which hit 231 million percent in July.

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