MarketView for September 18

Summary

  

The Treasury Department began to float around the idea of creating around a fund to take over the toxic housing-related bad debt that has been at the center of the destruction of bank balance sheets. The result was an almost instantaneous rally on Wall Street near the end to the trading day. The proposal was initially run by Congress and would be similar to the creation of the Resolution Trust Corp which was used to clean up bad debts from the savings and loan crisis in the late 1980s.

 

The Federal Reserve announced coordinated moves with five of the world's major central banks to inject up to $180 billion in liquidity into global money markets. That gave some reassurance to panicked investors, and slashed overnight money rates to 2 percent from 8.5 percent. So far authorities have spent $900 billion to prop up the financial system and housing market.

 

In other moves to restore confidence to markets, Britain's Financial Services Authority said it would bar investors from taking new short positions amid signs of a growing backlash against those who bet on price declines. The U.K. ban on short selling came after the U.S. Securities and Exchange Commission introduced rules under which short sellers and broker-dealers must deliver securities by the close of business on settlement day, three days after the sale.

 

Also, New York Attorney General Andrew Cuomo started a wide-ranging probe into possible illegal short selling. "I want the short-sellers to know today that I am watching," Cuomo said on a conference call with reporters. "If it is proper and legal then there is nothing to worry about."

 

After falling about 42 percent, Morgan Stanley ended the day up nearly 4 percent. Wachovia and Washington Mutual moved from massive losses to gains of 59 percent and 49 percent, respectively. Morgan Stanley and Goldman Sachs, the largest surviving independent Wall Street investment banks, have been facing concerns that the credit crunch could constrict the short-term funding they need to do business. Wachovia is currently in formal talks to merge with Morgan Stanley.

 

The dollar erased earlier losses against the euro and traded at session lows against the yen, buoyed by the news of a possible RTC-type plan.

 

Morgan Stanley, whose shares are down about 60 percent this month, has also approached sovereign wealth fund China Investment Corp about boosting its stake CIC invested $5 billion in Morgan Stanley last year. Washington Mutual has put itself up for sale and potential suitors include Citigroup, JPMorgan, Wells Fargo and HSBC. WaMu shares rose 49 percent.

 

Volatility was the name of the game. The Dow Jones industrial average fell as much as 150 points at one point, finally closing up 410 points.

 

Following its near-collapse and bailout, insurance giant American International Group Inc was replaced in the index by Kraft Foods.

 

Barclays announced a 750 million pound ($1.36 billion) fund-raising to help with its purchase of assets from Lehman Brothers.

 

Russian stock markets remained closed for a second day, with the Kremlin pledging $20 billion in support when they reopen on Friday.

 

Central Banks Pour Money Into Global Financial Markets

 

Key central banks around the globe joined forces on Thursday to throw a multi-billion dollar lifeline to the financial markets in an attempt to free up bank-to-bank lending frozen by the abomination on Wall Street. In an unprecedented move, the Fed made an extra $180 billion available to other major central banks to lend to their local commercial banks in a effort to get dollars circulating in overnight and short-term money markets.

 

The latest move brought to $247 billion the total amount of dollars the Fed was providing to other central banks. In addition, the Fed has added an extra $105 billion dollars into the U.S. market, a record amount that built on already large operations earlier this week.

 

Other central banks, including the Bank of England and the European Central Bank, also lent out extra funds in their own currencies in the wake of a round of takeovers and mergers among top financial firms and renewed concerns over the health of both the economy and the credit markets.

 

The financial markets where banks lend short-term funds to each other to smooth daily swings in their balances are crucial for the proper functioning of the financial system and the economy at large. Central banks have responded to a jump in interbank lending rates, exacerbated by the flight into safe havens of gold and government bonds, by flooding markets with cash, but so far have had only limited success.

 

There was considerable demand for dollars in auctions held by both the Fed and ECB, but the appetite was lower at the BoE's first dollar auction and at an auction held by the Swiss National Bank. However, demand for pounds at a separate BoE auction was heavy, as was demand for euros from an ECB tender.

 

In order to make the extra $180 billion in U.S. dollars available in other markets, the Fed increased existing currency swap lines with the ECB and Swiss National Bank, and established new ones with the Bank of Japan, Bank of Canada and the BoE. The lines will be in place through January. The SNB kept interest rates on hold on Thursday citing major uncertainties about the global economy and the impact of market moves, which it called "a matter for concern."

 

News of the huge coordinated action brought some relief to markets, initially buoying bank stocks and bond yields and cutting dollar borrowing costs. Overnight U.S. dollar interbank lending rates dropped as low as 2 percent.

 

Overnight dollar Libor rates fixed at 3.84375 percent from 5.03125 percent on Wednesday, although three-month rates rose across the board and the premium over expected official rates continued to rise.

 

As year end looms, adding to the already intense funding strains triggered by the biggest global financial crisis in decades, three month lending rates are spiking higher.

 

To help prevent the Fed spreading itself too thin, the Treasury Department on Wednesday took the extraordinary step of establishing securities auctions to raise funds for the U.S. central bank.

 

The Treasury auctioned $40 billion on Wednesday, $60 billion on Thursday, and announced an additional $60 billion dollar auction for Friday and a $40 billion auction for next Wednesday. The auctions have met with intense demand.

 

In other operations, central banks in Japan, Australia and India pumped a further $28 billion into their money markets.

 

In addition, China relaxed its policy for the second time this week, South Korea sold dollars in the swap market and said it would try to halt the slide in bond prices, the Philippines intervened to support the peso, and Taiwan warned it could use a state fund to prop up stocks.

 

Russia said it would assign 500 billion rubles ($19.59 billion) to support and stabilize its stock markets, where trade will resume on Friday. President Dmitry Medvedev said that half of the 500 billion rubles will come from the budget, and that further measures could be taken if necessary.

 

Jobless Claims Rise

 

The Labor Department reported on Thursday, prior to the opening bell that new applications for unemployment benefits rose unexpectedly last week to a seasonally adjusted 455,000 claims, up 10,000 claims from the prior week, largely due to Hurricane Gustav. Claims have now topped 400,000 for nine straight weeks, a level that economists consider a sign of a struggling economy. A year ago, the figure stood at about 320,000.

 

A Labor Department analyst said last week's number is the first to include claims stemming from job losses caused by Hurricane Gustav, which slammed into the Louisiana coast over the Labor Day weekend. The department wouldn't give a precise estimate of the hurricane's impact, but said claims would have fallen without it.

 

The four-week average of new claims, which smooth out fluctuations, rose by 5,000 to 445,000. The number of people continuing to receive unemployment benefits dropped 55,000 to 3.48 million, while the four-week average increased to 3.46 million, the highest in almost five years.

 

The Conference Board indicated in a separate report that its monthly forecast of future economic activity declined 0.5 percent in August. The drop was due to a fall in building permits and higher unemployment claims, the Board said.

 

Thursday's jobless figures were compiled before Lehman Brothers filed for bankruptcy and before Merrill Lynch agreed to be acquired by Bank of America. Those moves could put thousands of jobs at risk. Lehman has approximately 25,000 employees worldwide and Merrill Lynch has 60,000. Several other companies have announced layoffs in the past week, including Hewlett-Packard, newspaper chain McClatchy Co. and software developer Corel.

 

Crude Prices Higher

 

The price of crude oil was moderately higher at the close of trading on Thursday, closing off session highs. The late in the day market rally reduced concerns about the economy and demand for energy. Early in the trading day the contract topped $100 a barrel as investors uneasy about the worsening financial crisis flocked to commodities as a safe haven.

 

Light, sweet crude for October delivery settled up 72 cents per barrel at $97.88 on the New York Mercantile Exchange. The contract had reached as high as $102.24. In London, November Brent crude added 35 cents to end at $95.19 a barrel on the ICE Futures exchange.

 

Traders first sought commodities including oil as a hedge against the economic fallout from the financial crisis; they sent the October contract soaring $4 and past $100. The market was reacting in part to moves by the Federal Reserve and other foreign central banks to pump as much as $180 billion into global money markets in an effort to boost liquidity. However, traders soon realized that a financial meltdown and weak global economy would further erode already flagging demand for energy.

 

The stock market then surged on a CNBC report that the federal government was considering the creation of an entity that would hold the bad debt that has crippled U.S. financial institutions. The report sent the Dow Jones industrials up more than 400 points, which in turn raised oil traders' hopes that the financial crisis won't do more serious damage to the economy and demand for oil.

 

Stepped-up attacks by Nigerian militants against the country's oil infrastructure helped support oil prices. In a fifth day of violence, Nigeria's main militant group said Wednesday that it had destroyed an oil-pumping station and a pipeline crossing southern Nigeria in a rare daylight attack. A spokesman for Nigeria's state oil company said Wednesday that militant attacks are now cutting the country's daily oil production by about 1 million barrels a day, 40 percent of what the country produced before the militant campaign began three years ago.

 

Meanwhile, the House approved measures to curb speculation in oil and other commodity markets by hedge funds and large institutional traders. However, the White House said President Bush likely would veto the bill if it gets to his desk.

 

In other Nymex trading, heating oil futures fell nearly 4.23 cents to settle at $2.7824 a gallon, while gasoline prices added nearly 2 cents to finish at $2.4824 a gallon. Natural gas for October delivery slipped nearly 3 cents to close at $7.621 per 1,000 cubic feet.