Friday, August 10, 2007

All eyes on Wall Street as Fed intervenes

All eyes on Wall Street as Fed intervenes
By Andrew Wood in Hong Kong, Sudeep Doshi in London and Michael Mackenzie in New York
Copyright The Financial Times Limited 2007
Published: August 10 2007 08:56 | Last updated: August 10 2007 14:28

All eyes were on Wall Street on Friday as the sell-off in global equity markets entered its second day.

Central banks around the world tried to calm nerves after pumping $120bn of extra liquidity into the international capital markets in the face of steep falls in Asian and European equity markets.

The New York Federal Reserve followed counterparts in Asia and Europe and injected more funds than usual into the repurchase market to stabilise overnight lending rates.

Earlier the European Central Bank intervened for a second day after it made a fresh €61bn of funding available to financial institutions. The move by the ECB followed a €95bn injection of liquidity on Thursday which was followed by central bank intervention in Japan and Australia.

”Central banks are not supposed to be tightening credit when markets are in complete disarray,” said John Richards, head of Asia-Pacific Strategy at RBS Securities. ”And this is close to a complete disarray.”

Wall Street was braced for further losses. US futures prices changed rapidly in volatile pre-market trading. The S&P 500 futures were down 18.4 points at 1,439.5, Nasdaq futures were off 21.5 points at 1,924, while futures for the Dow Jones Industrial Average were down 147 points at 13,180.

European equities followed Asia and suffered more heavy losses.

The FTSE 100 in London was off its lows but down 2.8 per cent or 175 points at 6,095.3. The pan-regional Eurostoxx 50 was down 2.5 per cent at 4,168.09, Frankfurt’s Xetra Dax fell 1.5 per cent to 7,342.49, and the CAC 40 in Paris lost 2.7 per cent to 5,475.59.

Asian markets also fell heavily as they caught up with the global sell-off. In Tokyo, the Nikkei 225 average closed at a 5-month low, down 2.4 per cent or 407 points at 16,764.09, while in Sydney, the S&P/ASX 200 suffered its heaviest daily fall since the attacks on the United States in September 2001, losing 3.7 per cent at 5,936.0.

“Risk aversion has returned to the market with a vengeance. Current sentiment is likely to continue with Dow futures down,” said Melinda Smith, an analyst at ABN Amro.

Government bond yields fell and short-term interest rate futures rose for a second day. The yield on the 10-year benchmark gilt was five basis points lower at 5.2 per cent, while interest rate future contracts were up as much as eight ticks.

The three-month dollar rate was set at 5.57 per cent, up from 5.50 per cent on Thursday and 5.26 per cent earlier this week. The euro three-month rate was set at 4.45 per cent, above Thursday’s level of 4.399 per cent and 4.309 per cent at the start of the week.

In the derivatives market, the cost of insuring €10m of high-yield European corporate debt against default increased to €365,000 as concerns about the lack of liquidity in the market unsettled investors.

In the equity markets financial stocks once again suffered the heaviest losses as investors steared clear of a sector that has heavy exposure to the US subprime mortgage market through collaterised debt products.

Deutsche Bank became the latest European bank to reveal it had suffered heavy losses in one of its funds. The DWS ABS fund, which invests in asset-backed securities, had suffered outflows totalling around 30 per cent in the last week. The bank said that despite the drop in the value of the fund from €3bn to €2.1bn it would not hold redemtions. Deutsche Bank shares fell 5.4 per cent at €92.80.

BNP Paribas, which on Thursday suspended three of its funds because of losses linked to securitised debt products, lost 4.7 per cent at €78.70 in Paris.

In the UK Man Group was one of the heaviest fallers as rumours mounted that the world’s larged listed hedge fund could pull its upcoming US initial public offering due to uneasy credit conditions. The shares shed 6.6 per cent at 492p.

Dutch takeover target ABN Amro fell 5 per cent to €33.33 on concerns that Fortis will struggle to raise the €24bn in order to finance its part of the €71bn deal along with Royal Bank of Scotland and Santander. RBS is holding an EGM in Edinburgh on Friday to vote on its offer for the Dutch bank.

Shares in Fortis were down 3.5 per cent to €26.80 and RBS fell 5.4 per cent to 554p. Rival bidder Barclays lost 5.4 per cent at 644½p amid talk that it may withdraw its offer altogether.

The world’s biggest mining company, BHP Billiton, was 4.9 per cent down at £12.84, with competitor Rio Tinto losing 3.8 per cent at £30.82 and platinum mining group Lonmin 2.8 per cent lower at £31.79.

Old Mutual lost 4.2 per cent at 155p after it reported a 12 per cent fall in first-half operating profit at £782m due to weak the rand and dollar. The British and South African insurer, whose shares have been hit by concerns over subprime exposure, said on Friday that its exposure was tiny, representing just 4 per cent of its US assets.


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