So much for the idea that the bailout bill would produce a relief rally. Overseas equity markets are taking a beating. No word yet on how the credit markets are faring.
Investors are finally waking up to the notion that it isn’t just the US financial system that is in trouble, but that pretty much every advanced economy (save Japan, although Canada has yet to produce any bad headlines) has a banking system in not-so-good health. And economies that may indeed have sound banks will nevertheless be pulled down by the large number of institutions in their trading partners that are afflicted.
Update 5:30 AM; The reaction seems to be worsening as trading moves west. The FTSE is down 5%; Dow futures, however, are still down 220ish points. MacroMan is relatively sanguine:
The market’s vote of no confidence in Europe has been more acutely observed in the currency market, where recent EUR/USD resembles nothing so much as a band of lemmings jumping off a cliff. Was it really only two weeks ago that EUR/USD had its biggest daily gain in the nearly ten-year history of the single currency?…
So global equities are a sea of red, but as of yet today’s weakness is relatively controlled; there’s no sense of panic. Macro Man cannot help but think that risks of a global, coordinated rate cut have risen substantially, particularly after the ECB left the door open for an intra-meeting cut last week. It is perhaps this possibility that has kept today’s European sell-off relatively orderly. As suggested last week, the front end of Europe has firmed, with the Schatz future trading up nearly half a point from Friday’s settlement price.
Stocks tumbled around the world, the euro fell to a 13-month low against the dollar and oil dropped below $90 a barrel as the year-long credit market seizure caused bank bailouts to spread through Europe. Government bonds rallied.
Russia’s Micex Index fell 12 percent, leading declines among benchmark stock indexes. BHP Billiton Ltd. slid 8.9 percent and UBS AG lost 8.6 percent as commodities producers and banks dropped the most in the MSCI World Index. The gauge of 23 developed countries is down 30 percent this year, the worst annual performance since at least 1970.
The euro weakened more than 1 percent against the dollar after the German government and state banks were forced to pledge $68 billion to rescue Hypo Real Estate Holding AG. Crude dropped 39 percent from its record on July 11 as the global economy slows. Investors seeking the safety of government bonds pushed yields on two-year Treasury notes to 1.5 percent, 50 basis points below the Federal Reserve’s main interest rate.
“It’s like a fire,” said Emmanuel Soupre, a fund manager at Neuflize OBC Asset Management in Paris, which oversees the equivalent of $33 billion. “It’s easier to extinguish five minutes after the start. Now we’re about an hour into it. We have to act quickly to assure the continuity of the financial system to avoid an irreversible contamination of the entire economy.”
The MSCI World Index lost 2.5 percent to 1,110.21 at 9:35 a.m. in London as all 10 industry groups decreased. National markets in China, Germany, France, Japan, South Korea and the U.K. fell more than 4 percent.
Europe’s Dow Jones Stoxx 600 Index sank 4.1 percent as BNP Paribas SA said it will take control of Fortis in Belgium and Luxembourg. The MSCI Asia Pacific Index lost 4.4 percent. Futures on the Standard & Poor’s 500 Index slipped 2.1 percent, as JPMorgan Chase & Co., the biggest U.S. bank by deposits, fell 5.1 percent
From the Wall Street Journal, on Asian markets:
Asian stock markets plunged Monday as investors shrugged off a U.S. bank bailout and focused instead on deepening financial turmoil in Europe.
Tokyo’s Nikkei 225 Index hit its lowest level in more than four years, falling 4.3% to close at 10473.09. The Topix index of all the Tokyo Stock Exchange First Section issues fell 4.7% to 999.05.
Worries that the financial crisis is spreading to Europe and around the globe sparked concerns over global growth, overwhelming any relief from the U.S. House of Representatives’ passage of a $700 billion bank bailout Friday. Analysts say it is still unclear how quickly the rescue package will unfreeze credit markets and shore up the U.S. economy, a vital export market for Japan.
“We haven’t seen any positive developments in Europe or the U.S., apart from the rescue plan,” said Alex Tang, head of research at brokerage Core Pacific-Yamaichi in Hong Kong. “But even with the rescue plan, investors are focused on the slowing economy.”
Traders were spooked by Germany’s announcement Sunday of a new bailout package totaling €50 billion ($69 billion) for Hypo Real Estate, the country’s second-biggest commercial property lender, part of a scramble by European governments to save failing banks.
And the Journal on the morning action in Europe:
European shares fell sharply at the open on Monday after renewed turmoil in the financial sector over the weekend heightened anxiety over the state of the global economy.
Early Monday, the Dow Jones Stoxx 600 Index was down 3.9% at 251.20. The U.K.’s FTSE 100 Index was 4.5% lower at 4754.55, while France’s CAC-40 Index lost 4.5% to 3898.74. Germany’s DAX Index plummeted 4.3% to 5547.98….
“We now believe national recessions in the U.S. and the U.K. will be deeper and longer than previously forecast,” said Larry Hatheway, an economist at UBS in London. “For the first time, we also anticipate recession in the euro zone.”
Signs of a deepening European financial crisis continued to emerge. European leaders over the weekend vowed to restore confidence in the markets and to back the bloc’s banks, but failed to come up with a EU-wide response to the financial turmoil.