Articles from September 2008



Equities tumble as Congress rejects plan

Yesterday saw government intervention across the globe on an unprecedented scale. Fortis, Bradford & Bingley, Wachovia, Glitnir and Germany’s Hypo Real Estate all requiring external support.

Furthermore, central banks pumped a further $330bn into the system in another attempt to provide liquidity to global money markets.

All eyes were on the US last night as Paulson’s Emergency Economic Stabilization Act of 2008 went to vote. Surprisingly, the $700bn proposal which was backed by the Bush administration and leaders of both parties, was rejected by the House of Representatives by a vote of 228 to 205.

The rejection caused US equity markets to fall sharply. Markets across Asia also closed markedly lower, underlining the fact that the financial problems are not restricted to Wall Street.

In terms of economic releases, yesterday’s Bank of England mortgage data reported the first fall in mortgage debt since records began in 1993. Although August is generally the quietest month for house sales, last month saw only 32,000 mortgage approvals – 70% fewer than a year ago, suggesting that the decline in house sales and prices will continue into next year.

The European Commission’s report showing that sentiment fell to a more-than-expected 87.7 in September also weighed on the euro.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bradford & Bingley nationalised as banking crisis deepens

Another turbulent week has seen further intervention from governments in the US, UK and Europe in an attempt to alleviate pressures on the global financial environment.

The publication of the Emergency Economic Stabilization Act (EESA) of 2008 adds colour to last week’s negotiations between the US Treasury and Congress and details how Hank Paulson’s $700bn bailout package is hoped to rescue America’s financial system.

According to the deal, US government will receive the money in tranches – $250bn initially; $100bn at the request of the White House, and release of the remaining $350bn can be vetoed by Congress.

In order to ensure that taxpayers will benefit from recovery of the banks that sell their toxic assets to the government, Treasury will obtain equity warrants and create an industry-funded insurance programme that banks will be obliged to join.

Once again, Bush backed the proposed legislation, stating “the bill provides the necessary tools and funding to help protect our economy against a system-wide breakdown”. The act has now been frozen, i.e. individual provisions cannot be altered. The House is expected to vote on the legislation today and it is due to go before Senate later in the week.

The decision to nationalise Bradford & Bingley has been announced this morning. Spain’s Santander, which recently purchased Alliance and Leicester, has decided to acquire B&B;’s £24bn deposit book and it’s chain of 197 branches for £612m.

Banco Santander has also been named (along with Citigroup and Wells Fargo) as a potential buyer for struggling US bank Wachovia.

Meanwhile, Fortis caused a stir in Europe as the Dutch, Belgian and Luxembourgian governments combined to inject much needed capital into the bank.

Under the terms of last nights deal, each of the three governments will buy 49% of the Fortis subsidiaries in their respective country. The decision to partly nationalise Fortis came after attempts to sell the group privately to BNP Paribas and ING failed to materialise due to the pair demanding government guarantees over any losses that may be incurred.

Nerves dominated Friday’s trading session, with traders uncertain about the US’s rescue plan and deciding to wait on the sidelines until an agreement is reached. Many USD investors fled the currency as economic conditions in the US continue to deteriorate and analysts continue to be weary of the greenback’s progress in the longer term.

That being said, dollar gained on the euro as expectations for a rate cut in the eurozone rose amid increasingly dire economic releases from the region.

In light of these unprecedented events, economic data is likely to take a back seat again this week, although investors will be looking to the ECB on Thursday for the monthly rate announcement.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

A week of wrangling over Fed bailout

This mornings financial news is again dominated by the €˜on again / off again US Treasury bailout.

Despite George Bush urging €˜swift action to avoid a €˜long and painful recession, wrangling over the details of the proposal has meant that Friday is now upon us, with still no deal confirmed.

The Republicans, while agreeing to a number of the Democrats demands which would see the Treasury buy up a number of banks €˜risky assets, are now attempting to put in place additional measures to prevent €˜excessive pay of bank executives who are involved in the scheme.

Whilst it seems likely that if Paulson is to get his wish of the near $750 billion bailout, his access to the funds will come in the form of staggered payments, rather than a lump sum.

Earlier yesterday, it had been thought that a deal was extremely close to being agreed, and both the Dollar and US equities rallied as a result, with the S&P; 500 closing up 2% and the FTSE Eurofirst 300 rose 2.16% to 1,125.43.

However, the stalling of US politicians and failure to agree a deal has seen some of the Dollar strength and gains in equities reverse this morning. Some economists are now warning investors not to get too carried away by hopes of the US Treasury deal as worries regarding the wider global economy would not be going away any time soon.

This view was reflected in economic data released in the US yesterday. US New Home Sales fell in August to a 17 year low, dropping 11.5% to an annual rate of 460,000, the fewest since January 1991. Orders for Durable Goods in the US also dropped 4.5% in August, more than twice as much as had been forecast by economists, a clear sign that the tightening credit conditions had seen a cut back in spending.

These figures added to last weeks Initial Jobless Claims figure, which at 493,000 was the highest since September 2001, all point to the fact that the US economy is still very much stuttering along.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Debate escalates on Fed bailout plan

Another day of falling crude oil prices and the morale boost investors experienced on reports of Warren Buffet’s $5bn investment in Goldman Sachs saw the dollar gain ground against the euro and other major currencies yesterday.

First thing this morning the Pound regained its upward momentum against the dollar following comments from Bank of England member Andrew Sentance stating that the central bank must control its response to the financial crisis and remember its mandate of inflation control.

There has been a shift in thinking within the Bank of England to that of a more “€˜dovish stance”. That said there is still a large proportion of people who believe the Bank of England will lower rates when they next meet on October 8th.

The ongoing debate between US Treasury Secretary Paulson, Fed Chairman Bernanke and Congress has seen scepticism from both Democrat and Republican politicians. Congressman from both sides wanted assurances that the Treasury Asset Relief Programme wouldn’t result in a waste of public funds.

Paulson attempted to provide comfort by explaining “the program we have proposed is not a spending program. It is an asset purchase program, and the assets which are bought and held will ultimately be resold with the proceeds coming back to the government”.

George Bush expressed his support through a broadcast to the nation on primetime television, urging them to back the plan in order to ease a “serious financial crisis”.

Furthermore, John McCain emphasised that he was prepared to suspend his presidential campaign until a solution was agreed, pressuring Obama to do the same. The uncertainty surrounding which aspects of €œPaulson’s Plan will be approved forced a flight to safety which saw interbank lending rates hit record highs yesterday.

Whilst economic releases continue to take a back seat in determining the direction of the markets, German IFO figures fell to a lower than expected 92.9 in September at€“ it’s lowest rate since May 2005, pointing to the growing threat of recession in the Eurozone economy. US home sales also reported a fall to its slowest pace in 17 years.

Some key data out in the US today; New home sales, Unemployment claims and Core durable goods orders.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Focus on Congress for vote on bailout

The focus remains on the uncertainty surrounding the U.S. bailout package and the details of how exactly the final version will look.

In their speech to the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told members of Congress that the U.S. economy and its financial markets face serious risks if the rescue plan for the crippling toxic assets isn’t swiftly approved.

Bernanke urged Congress to pass the $700bn bailout plan to “stabilize the situation”. He stressed that “global financial markets remain under extraordinary stress” and “if financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.”

Paulson reiterated that further delay in implementing the plan would “threaten American families’ financial well-being, the viability of businesses both small and large and the very health of our economy”.

Fundamentally, the US Treasury aims to purchase all the toxic assets that are currently clogging the financial system and sell those assets at a profit once markets have improved. The scheme could cost the US taxpayer as much as $1 trillion, increasing the country’s national deficit to over $11 trillion.

Earlier gains on the U.S. stock market were reversed as the saga unravelled and oil prices dropped from Monday’s peaks, to close last night at around $107 a barrel, boosting the dollar.

The Euro Zone escaped the limelight yesterday due to the focus on U.S. events. Attention in the Euro Zone was on PMI where the index now points to a 0.2% decline in quarterly gross domestic product.

The data provides little evidence that the outlook will improve significantly in the near term and it looks like the third quarter is going to be challenging.

In the UK, British mortgage approvals fell 64% on the year to a record low in August. This seems to suggest there is no imminent end in sight for the country’s housing market woes.

The British Bankers Association blamed the drop on uncertainty regarding the government’s policy on stamp duty along with the continued affordability pressures and tight lending conditions.

With these poor fundamentals for the housing market it remains uncertain as to whether the recently announced labour government measures to support the housing market will have any significant impact in stabilising activity or prices.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money’s concerns rise over Fed bailout

Friday’s dollar rally was replaced by yesterday’s sell-off as jitters about the US government’s $700bn bailout plan for the financial sector set in and investors mulled the inflationary implications of the government plan.

The greenback felt the pressure as investors flocked to precious metals and oil. USD experienced the biggest one-day drop against the euro since the currency was formed nine years ago, whilst sterling hit a 3-week high against the dollar.

The flight to commodities forced investors who were betting on falling oil prices to cover their short positions due to the massive surge in crude oil.

Failure to do so would have resulted in traders being obliged to take physical delivery of the oil. The largest one-day rise on record saw oil jump to an intraday high of $130 a barrel before falling right back to this morning’s opening price of $108.

Meanwhile, Alastair Darling took the opportunity at Labour’s Manchester Conference to speak about the “unprecedented economic challenges” facing the UK, saying that he was committed to restoring financial stability through more stringent legislation and regulation of the financial system.

The market will be watching closely as the terms of Hank Paulson’s financial relief programme are unveiled. Both he and Federal Reserve Board Chairman Ben Bernanke are due to testify before the Senate Banking Committee today.

Market data will probably take more of a back seat once again, with the most likely market mover being the euro zone PMI survey for September.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Investors weigh up the Feds rescue package.

Friday saw initial gains made by the dollar slip away as investors weighed up the effects of the US government’s colossal takeover of bad assets from financial firms.

US Treasury Secretary Hank Paulson highlighted the requirement to address the root cause of the current financial turmoil. He called for a government sponsored package that would effectively remove the illiquid mortgage assets “€˜that are weighing down our financial institutions and threatening our economy”.

Under the draft Treasury plans, any financial institutions with €˜significant operations in the US’ are eligible to sell or auction their bad debts to the Treasury fund – this morning, the scope of the $700bn plan was widened to include assets other than mortgage-related securities.

Although the change to include other devalued assets may force an increase in the size of the package as the legislation proceeds through Congress, George Bush defended the plan, saying the cost to taxpayers of shoring up markets was better than the alternative of job losses and diminished pensions. Ben Bernanke and Hank Paulson will provide testimony to Congress this week.

Meanwhile, fears that Morgan Stanley and Goldman Sachs would not be able to survive the continuing pressure have been allayed by the Federal Reserve granting their requests to change their regulatory status.

Last night, both become bank holding companies, allowing them to take deposits from investors as opposed to using borrowed money “ the leverage that led to the undoing of Bear Stearns and Lehmans. The move concluded that there is no future remaining in investments banks now that investors have determined the model is broke.

The dollar fell against most major currencies, except the yen, as risk aversion receded. The weekend press emphasised that the implications of the US bailout plan could undermined the dollar due to the inflationary impact and the fact that US Treasuries would be less attractive to foreign investors and central Banks.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Central banks unite to increase liquidity

The central banks announced in a joint statement yesterday that they will pump an additional $247bn into the financial system to ease the liquidity constraints which had deteriorated this week.

This action was an attempt to alleviate the pressures in the US Dollar short-term funding markets, and as a result the overnight US Dollar rate declined to 3.84% after a three day increase to the highest level since January.

In an attempt to curb manipulative trading, the FSA and SEC have announced that they will be placing a ban on investors from short-selling financial stocks. The FSA ban is set to last to the 16 Jan, after which the FSA are then due to issue comprehensive new shorting rules, whereas the SEC ban will last to the 02 Oct.

Along with the news of the ban on short-selling there were also reports that congressional leaders had met late on Thursday with Hank Paulson and Ben Benanke to decide on a solution to the financial turmoil.

It has been said that discussions centred around addressing the root cause of the credit crisis by removing the troubled assets from the balance sheets of American Institutions. The move would involve the creation of a US government sponsored vehicle that would be used to house the toxic assets in an attempt to return confidence and liquidity to markets.

The release of the information led to a rally in US stocks with the Dow Jones up 410 points at 11,020 and the S&P; up 50 points to 1,207. This rally continued overnight in Asian markets as the Nikkei climbed 392 points to 11,881 and to no surprise has allowed the FTSE to jump 300 points in opening trade.

UK Retail Sales reported an unexpected increase as sales climbed 1.2% in August and 3.3% for the year. This is further support that the BOE will want to see inflation risks ease before they consider cutting rates.

In the US the initial jobless claims rose by 10,000 to 455,000 in the week ending 13 Sep, this is led by an increase in filings in Louisiana following Hurricane Gustav.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK Government to assist Lloyds takeover of HBOS

Lloyds TSB last night sealed a £12.2bn takeover over HBOS, the UK’s largest mortgage lender.

The labour government, who was active in negotiations in the 232p all shares deal, has waived competition rules to allow the merger. In the US it emerged yesterday evening that Morgan Stanley is in preliminary talks with Wachovia in another possible merger.

Earlier in the day the $85bn rescue deal of AIG had failed to negate anxiety in the equity markets as investors sought the traditional safe havens of US Treasuries and gold. Short term yields fell as low as 0.2 per cent while bullion prices gained 11.4 per cent.

The S&P; 500 index shed 4.7 per cent while the FTSE 100 closed below 5,000 for the first time since June 2005. Asian trading overnight continued the trend as the main indices all lost ground while the Russian government closed the country’s two main exchanges to halt declines.

In currencies, the Dollar fell against sterling, the euro and the yen on the back of the concerns over financial stocks while sterling lost ground on the euro after unemployment figures reached their highest levels since 1999.

Oil prices rose as inventories fell more than expected, with West Texas and Brent reaching $97 and $95 per barrel respectively.

Central banks have responded to the concerns in markets by announcing coordinated action ‘designed to address continued elevated pressures in US Dollar short-term funding,’ in a joint statement made this morning. The Bank of England will offer further overnight loans in an effort to aid liquidity.

The release of the minutes of the Monetary Policy Committee’s last rate decision revealed a slightly more dovish stance with Besley no longer calling for a hike while committed dove Blanchflower raising his cut call to 50bps. The voting showed an overall 8-1 majority in favour of holding rates at 5.25 per cent.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Who will be next- AIG?

Wall Street saw another destructive day yesterday with another rescue attempt – this time for AIG. It appears the last few months was the silence before the storm and now big investment banks fall like dominos.

U.S. authorities pumped USD 85 billion into insurance company American International Group to bridge over potential bankruptcy. The deal between the Federal Reserve and AIG is cash for equity stake (79.9%) for the next two years with the loan charged at 3 months USD + 580bp.

Without a doubt if AIG had been written off by the Fed like Lehman Brothers this would have had a huge knock on effect on other financial institutions and companies around the globe. So far the Fed has pumped USD 700 billion into the financial systems.

Barclays also surprised the markets yesterday by agreeing to acquire several business parts of Lehman after pulling out of a total acquisition over the weekend. The deal includes Lehman North American sales and trading and investment banking businesses.

Around 10,000 ex-Lehman employees will receive a Barclays pay cheque going forward. This still leaves 16,000 people on the street forced to look for alternative employment.

Another name repeatedly mentioned in the press is Morgan Stanley. The U.S. investment bank is still indecisive as to “shop around” for a partner with a stronger capital position than themselves. The recent turmoil in the stock market has not helped matters to bring some stability to Morgan Stanley but at this point in time it is a waiting game for a lot of institutions.

Simultaneously the square mile was not spared either with the Bank of England being forced to inject a further 20 billion pounds into the system following the collapse of Lehman Brothers.

Yesterday afternoon one of the main rating agencies Standard & Poor’s took drastic action and downgraded HBOS’ long- and short-term counterparty credit rating from AA to single A. The outlook on HBOS and its entities remained stable. Fitch followed suite three hours after S&P;’s announcement.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.