Doubts Grow About US Rescue Plan

DAVID OAKLEY / Financial Times (UK) 23sep2008

Uncertainty over the US plan to buy up toxic assets kept equity markets on the back foot on Tuesday as investors remained distinctly cautious over how much the $700bn package could help the ailing banking system.

The downbeat mood prompted falls in the FTSE 100, FTSE Eurofirst 300 and Nikkei 225 Average, and hung over the S&P 500, which inched into positive territory by mid-session.

Nigel Rendell, a strategist at RBC Capital Markets, said: “Doubts about the US initiative are taking the shine off everything, whether it is in the developed or developing world. Most equity markets are down.”

Edmund Shing, European equities strategist at BNP Paribas, said: “Uncertainty is the word, uncertainty over whether the US can stop the slide in the banking system. We are all groping around in the dark as to whether this is a turning point and whether the markets have hit bottom.”

Richard Berner, at Morgan Stanley, was more upbeat, saying the Treasury plans had “a good chance to work if used aggressively”.

“The plan should alleviate the credit crunch, narrow credit spreads, and promote expectations for an eventual rebound in earnings,” he added.

Meanwhile, strains in the money markets continued, with London interbank rates edging higher for all term aturities beyond two weeks.

The yield spread between three-month Libor and the Fed funds rate rose a further 1.375 basis point to 121.125bp, its widest spread since December 1987, which was two months after the stock market crash of that year.

Tony Crescenzi, strategist at Miller Tabak, said the move reflected “continued funding strains in the inter-bank market and anxieties over the US financial system in general. It will take time for nerves to calm in light of recent events.”

The rise in term Libor for dollars, sterling and euro money markets was accompanied by higher swap rates. These measure the difference between average overnight rates over the next three months and three month Libor.

The US spread opened at 130bp and rose to 141bp . The overnight asset-backed commercial paper rate rose to 4.61 per cent from 3.75 per cent on Monday.

The uncertainty halted the rally in emerging markets, which have been on an upward path since Friday. Russia’s benchmark Micex Index dropped 3.1 per cent after a record 29 per cent two-day gain, while the MSCI emerging markets shares index fell 2.3 per cent to 834.57.

Government bond prices rose, with the 10-year German bund reversing a four-day decline after a report showing the contraction in eurozone manufacturing and services was continuing. Significantly, the yield on the two-year bund fell more sharply than the 10-year, a signal that traders believe shows the outlook for the world economy has deteriorated. US Treasury prices were also higher.

Credit default swap spreads increased with the iTraxx Europe index, which tracks 125 investment grade names, rising 7bp to 111bp, or €111,000 to insure €10m of debt over five years. The iTraxx Crossover index, which is made up of 50 mostly junk-rated credits, rose 19bp to 580bp.

The dollar recouped some of its losses after the sharp sell-off on Monday as the weak eurozone figures gave it a firmer tone. It rose 0.4 per cent against the euro, 0.2 per cent against sterling and 0.2 per cent against the yen.

The South African rand was one of the biggest movers as it dropped 3.2 per cent against the dollar to a low of R8.2120 amid political uncertainty after Trevor Manuel, the country’s finance minister, resigned following Thabo Mbeki’s ousting by the African National Congress. It later pared losses to stand down 1.9 per cent at R8.1350 after it became clear Mr Manuel was likely to be re-appointed.

Oil lost some of its shine after its record one-day surge on Monday. The new November contract fell around $2 to $106 a barrel. The October contract had jumped $25 a barrel on Monday as investors betting on falling oil prices were forced to cover their positions ahead of its expiry.

Gold prices also fell back amid some profit-taking, following big gains on Monday because of worries that the US plan to buy up toxic assets could add to inflationary pressures.

source: 23sep2008