Tag Archive for 'Capital Markets'

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The Downturn

Global share markets have fallen back amid investors’ widening fears of a sustained worldwide economic recession.

It is startling how quickly and savagely the global credit crunch is morphing into a full-blown economic crisis.

The latest gloomy news on the economy took the euro below $1,26. Six months ago, a euro would buy as much as $1,60. Such has been the severity of the recent shifts in currency markets that the euro is one of the better performing global currencies. It is down by 14% against the dollar this year; the pound by 22%. A good chunk of that fall took place in the past week.

A handful of rich-country currencies have fared worse. The Norwegian krone and Canadian, New Zealand and Australian dollars have fallen by still more, partly a reflection of the worsening prospects for economies that are sensitive to falling oil and commodity prices (Source).

Not every currency can go down. As investors pull funds from one country they need to find a new home for their money. The favoured destination for now-skittish capital is Japan. The yen which has risen, according to intra-day trading, by a fifth against the dollar since the start of the year, is proving attractive because of Japan’s status as the world’s biggest creditor nation.

When credit is drying up, investors steer clear of countries with current-account deficits, since their economies rely on overseas borrowing to sustain them. But Japan habitually runs trade surpluses and, as a consequence, has built up a big stock of foreign assets (Source).

Continuously updated coverage on the global financial turmoil can be found here: Reuters|From Wall St to Your Street, BBC|Global Financial Crisis, and BBC|The downturn .

Gains, gains, everywhere

The eight-day losing streak ends Monday after central banks and governments announced measures to bolster the global financial system.

At the close Monday (October 13th), the Dow Jones industrial average soared 936.42 points, or 11.08%, to 9,387.61 — the biggest point gain ever. The S&P 500 index climbed 104.13 points, or 11.58%, to 1,003.35, boosted by shares of investment banking and brokerages and auto manufacturers. The Nasdaq composite index rose 194.74 points, or 11.81%, to 1,844.25.

Furthrmore, equities and currencies in Asia, Latin America, Europe and the Middle East rallied Monday as well. Rebounding from last week’s steep losses after governments around the world laid out measures in response to the global financial crisis, boosting risk appetite and investor sentiment.

A round up of the global turmoil around the world can be found here.

Global Stockmarkets Plummet

Stock markets in Asia and Europe plummeted on Friday October 10th. Japan’s stockmarket ended the week in disarray: the Nikkei 225-share index fell by 24% on the week, twice the weekly fall of the 1987 crash. It is now at five-and-a-half-year lows. Europe followed suit. London’s FTSE 100 slumped by more than 10% within minutes of opening; by mid-morning European stocks were also down, with Germany’s DAX index down by more than 8%. Amid widespread anxiety the oil price also tumbled, to around $81 a barrel, its lowest level in a year.

The falls underline that stockmarkets, traumatised by the near-paralysis in credit markets, the collapse of once-mighty banks and the prospect of global recession, are suffering what has been dubbed a “cascading crash”: a series of blows which, added together, are stomach-churning. Source: BBC, The Economist and BusinessWeek.

“Major global downturn” says IMF

The world economy is entering a major downturn in the biggest financial crisis since the 1930s, said the International Monetary Fund (IMF).

In a hard-hitting report, the IMF warned the global economy was facing its most dangerous crisis for 70 years. World economic growth will slow substantially this year, and only pick up modestly later in 2009, it said.

Inside Wall Street’s 36 Hours of Alarm

“If we don’t do this, we may not have an economy on Monday.”

So said Federal Reserve Chairman Ben Bernanke, according to The New York Times, in an emergency meeting on Thursday, Sept. 18 — part of a 36-hour period that The Times says included “two of the scariest days ever in financial markets.”

It was during this period when Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. decided to use the “break the glass” rescue plan they had been developing, a plan that became the $700 billion bailout proposal being hotly debated in Congress.

The NY Times article, reported by Andrew Ross Sorkin, Diana B. Henriques, Edmund L. Andrews and Joe Nocera and written by Mr. Nocera, recounts the fear that ran up and down Wall Street on these days. It was the big investors who were the most panicked, Mr. Nocera wrote.

Global Financial Crisis

A detailed background analysis on the current situation around the financial crisis can be found here (BBC Global Financial Crisis), here (Wharton, Wall Street’s Day of Reckoning: What’s Next), and here (HBS, Financial Crisis Caution Urged). A graphical overview of the crisis can be found here.

Where now for capitalism?

Stock markets are plunging and investment banks collapsing. What does this mean for the future of capitalism? Do we need more regulation or, indeed, less? Can bank mergers save the day? Leading economists, thinkers and analysts give their views at this section of the BBC webpage.

High leverage is out, (retail) deposit is back…

The last two major investment banks (Goldman Sachs and Morgan Stanley) in the US have changed their status to become bank holding companies, allowing them to take deposits from investors. The changes should enable Goldman Sachs and Morgan Stanley to raise more funds by opening commercial banks.

The move – part of a huge restructuring effort on Wall Street – will also give them access to Federal Reserve support. The US government has announced a $700bn (£382bn) package to tackle the worst financial crisis for decades.

Goldman Sachs and Morgan Stanley, the last two independent investment banks, will become bank holding companies, the Federal Reserve said Sunday night, a move that will fundamentally alter the landscape of Wall Street.

Transforming these investment giants into licensed, deposit-taking banks marked the end of an era for Wall Street. It heralds new regulations and supervision of previously lightly regulated investment banks, as well as an end to the outsize paychecks that helped shape the image of the chest-thumping Wall Street banker.

Source:
Bloomberg
BBC
NYTimes

Too big to fail…

American finance has a new, if reluctant, kingpin: the government. In a dramatic move on the evening of Tuesday September 16th the Federal Reserve agreed to provide American International Group with a loan of $85 billion (€59 billion) to help it stave off bankruptcy.

In return, either the Fed or Treasury will take effective control of the company, which until recently was an icon of private-sector capitalism. After the historic events of the past fortnight, who would bet that AIG will be the last lumbering giant to need resuscitation? Source.

On another note. Gold prices exploded Wednesday — posting the biggest one-day gain ever in dollar terms ($90.40, or 11.6 percent, to $870.90) — as fears of more credit market turmoil unnerved investors and triggered a flood of safe-haven buying. Read more.

Global Market Turmoil Continues

Once the gold standard in the insurance industry, AIG is the latest victim of the meltdown in the credit markets. The insurance business is all about risk—understanding it, minimizing it, pricing to compensate for it. But American International Group (AIG), the biggest insurance company in the world, seems to have had very little concept of the risk it held in its own businesses. If AIG goes, it is hard to think what else would be considered as too big to fail.

Barry Ritholtz, a prominent financial pundit, writes with tongue not entirely in cheek that the first lesson from the government’s bail-out of Bear Stearns in March was to “Go Big”. “Don’t just risk your company, risk the entire world of finance. Modest incompetence is insufficient—if you merely destroy your own company, you won’t get rescued. You have to threaten to bring down the entire global financial system.”




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