* Larry Elliott, economics editor, Graeme Wearden and Katie Allen
* guardian.co.uk,
* Thursday March 13 2008
This article was first published on guardian.co.uk on Thursday March 13 2008. It was last updated at 17:59 on March 13 2008.
Equity markets wobbled today on fears over a weak dollar, credit market turmoil and impending recession, but jitters subsided somewhat in late trading and the Dow recovered slightly by 6pm GMT.
Markets in Asia, Europe and the US have all been sold off over the last 24 hours. The dollar is also coming under significant pressure, not helped by more bad news from the US economy today, this time on high street spending. Meanwhile oil and gold have shot up to record highs on the back of the weakening US currency.
The dollar fell below 100 yen for the first time in 12 years today and hit a new record low against the euro amid fears in currency markets that the US financial system is vulnerable to the recession spreading from the crisis-hit housing sector.
With troubled hedge fund Carlyle Capital Corp (CCC) lurching towards collapse, stock markets fell sharply as investors feared that the financial turbulance was approaching a new level. There was some respite from credit ratings agency Standard & Poor's comments that an end to sub-prime write-downs for large financial institutions is in sight. The remarks appeared to lift US stock markets off their earlier lows but they remained sharply lower.
The slight recovery in the dollar and easing oil prices also helped stock markets tentatively recover their nerves.
The Dow had sold off sharply after the opening bell, but at 6pm GMT was up around 12 points to 12,123.
The FTSE 100 ended the day down 84 points, or 1.5%, at 5692.4, also off earlier lows.
Less than 48 hours after America's central bank, the Federal Reserve, sought to shore up banks with a $200bn (£100bn) package of emergency fundings, Derek Halpenny, currency economist at BTM-UFJ, warned that "we are entering dollar crisis mode".
"Looking at the markets there is a complete loss of confidence and that's because the markets are concerned over the US financial sector and ultimately what the Fed will be forced to do to support that sector," Halpenny said.
Dealers were selling the greenback aggressively today in expectation that the Federal Reserve will ignore the threat of rising inflation and cut interest rates by a further 0.75 percentage points next week. Borrowing costs have already been cut by 1.25 points this year and currently stand at 3%.
News that US retail sales fell last month defied analyst expectations for a rise and deepened the gloom around the world's largest economy. US government data showed consumers cutting back and sales slumping 0.6% in February, cementing expectations of the big rate cut from the Fed.
Rob Carnell, economist at ING Financial Markets said the latest data compounded the bad news from weak US employment figures.
"Following two consecutive months of negative payrolls growth, about the only box remaining to be ticked before the US recession could be confirmed 'official' was some weaker spending data. Well consider that box well and truly ticked now," he said.
"A 50 basis point cut on March 18 looks an absolute minimum."
The prospect of lower US borrowing costs has been hammering the dollar and it fell across the board on foreign exchange markets, losing more than 1.5% against the Japanese currency to trade as low as ¥99.77 at one point. By late-afternoon UK time it had climbed back to ¥100.59.
It was trading at just above $1.56 against the euro and was close to a record low against the Swiss franc. The pound also gained ground against the dollar, moving up to $2.033.
With the dollar weakening, other financial markets were also jittery and demand soared for safe-haven assets such as gold. Futures in the precious metal pushed through $1,000 an ounce for the first time ever, while crude oil was changing hands at more than $110 a barrel - adding to inflationary pressures in the global economy. London Brent crude was up more than $1 to a fresh record above $107.
With the problems of the US in focus, the country's treasury secretary Henry Paulson today came out urging US financial institutions to raise capital quickly so they can keep lending. He also pledged tougher rules for the mortgage industry.
Analysts said the problems emerging in US hedge funds and private equity firms as a result of the losses made on investments based on sub-prime mortgages were the reason the impact of the Fed action this week on the dollar had proved short-lived.
This has been underlined by the rapid implosion of CCC. It had borrowed around $20bn from the world's banks to invest in mortgage securities, and its financial position began to unwind last week as some lenders demanded their money back. Today it admitted that it had failed to agree a new rescue package with its lenders, and has defaulted on $16.6bn of its debts.
"Overall, it has become apparent to the company that the basis on which lenders are willing to provide financing against the company's collateral has changed so substantially that a successful refinancing is not possible," the fund said in a statement.
It also said that it is unable to meet its latest round of margin calls - demands for cash to cover a drop in the value of its assets - which is likely to force it into liquidation.
The collapse of CCC is likely to have a knock-on effect on other funds, by driving down the value of mortgage-backed assets and making banks more nervous about their exposure to the sector.
Equity markets wobbled today on fears over a weak dollar, credit market turmoil and impending recession, but jitters subsided somewhat in late trading and the Dow recovered slightly by 6pm GMT.
Markets in Asia, Europe and the US have all been sold off over the last 24 hours. The dollar is also coming under significant pressure, not helped by more bad news from the US economy today, this time on high street spending. Meanwhile oil and gold have shot up to record highs on the back of the weakening US currency.
The dollar fell below 100 yen for the first time in 12 years today and hit a new record low against the euro amid fears in currency markets that the US financial system is vulnerable to the recession spreading from the crisis-hit housing sector.
With troubled hedge fund Carlyle Capital Corp (CCC) lurching towards collapse, stock markets fell sharply as investors feared that the financial turbulance was approaching a new level. There was some respite from credit ratings agency Standard & Poor's comments that an end to sub-prime write-downs for large financial institutions is in sight. The remarks appeared to lift US stock markets off their earlier lows but they remained sharply lower.
The slight recovery in the dollar and easing oil prices also helped stock markets tentatively recover their nerves.
The Dow had sold off sharply after the opening bell, but at 6pm GMT was up around 12 points to 12,123.
The FTSE 100 ended the day down 84 points, or 1.5%, at 5692.4, also off earlier lows.
Less than 48 hours after America's central bank, the Federal Reserve, sought to shore up banks with a $200bn (£100bn) package of emergency fundings, Derek Halpenny, currency economist at BTM-UFJ, warned that "we are entering dollar crisis mode".
"Looking at the markets there is a complete loss of confidence and that's because the markets are concerned over the US financial sector and ultimately what the Fed will be forced to do to support that sector," Halpenny said.
Dealers were selling the greenback aggressively today in expectation that the Federal Reserve will ignore the threat of rising inflation and cut interest rates by a further 0.75 percentage points next week. Borrowing costs have already been cut by 1.25 points this year and currently stand at 3%.
News that US retail sales fell last month defied analyst expectations for a rise and deepened the gloom around the world's largest economy. US government data showed consumers cutting back and sales slumping 0.6% in February, cementing expectations of the big rate cut from the Fed.
Rob Carnell, economist at ING Financial Markets said the latest data compounded the bad news from weak US employment figures.
"Following two consecutive months of negative payrolls growth, about the only box remaining to be ticked before the US recession could be confirmed 'official' was some weaker spending data. Well consider that box well and truly ticked now," he said.
"A 50 basis point cut on March 18 looks an absolute minimum."
The prospect of lower US borrowing costs has been hammering the dollar and it fell across the board on foreign exchange markets, losing more than 1.5% against the Japanese currency to trade as low as ¥99.77 at one point. By late-afternoon UK time it had climbed back to ¥100.59.
It was trading at just above $1.56 against the euro and was close to a record low against the Swiss franc. The pound also gained ground against the dollar, moving up to $2.033.
With the dollar weakening, other financial markets were also jittery and demand soared for safe-haven assets such as gold. Futures in the precious metal pushed through $1,000 an ounce for the first time ever, while crude oil was changing hands at more than $110 a barrel - adding to inflationary pressures in the global economy. London Brent crude was up more than $1 to a fresh record above $107.
With the problems of the US in focus, the country's treasury secretary Henry Paulson today came out urging US financial institutions to raise capital quickly so they can keep lending. He also pledged tougher rules for the mortgage industry.
Analysts said the problems emerging in US hedge funds and private equity firms as a result of the losses made on investments based on sub-prime mortgages were the reason the impact of the Fed action this week on the dollar had proved short-lived.
This has been underlined by the rapid implosion of CCC. It had borrowed around $20bn from the world's banks to invest in mortgage securities, and its financial position began to unwind last week as some lenders demanded their money back. Today it admitted that it had failed to agree a new rescue package with its lenders, and has defaulted on $16.6bn of its debts.
"Overall, it has become apparent to the company that the basis on which lenders are willing to provide financing against the company's collateral has changed so substantially that a successful refinancing is not possible," the fund said in a statement.
It also said that it is unable to meet its latest round of margin calls - demands for cash to cover a drop in the value of its assets - which is likely to force it into liquidation.
The collapse of CCC is likely to have a knock-on effect on other funds, by driving down the value of mortgage-backed assets and making banks more nervous about their exposure to the sector.
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