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Credit markets show signs of thaw

Credit markets show signs of thaw

NEW YORK/LONDON, Nov 4 (Reuters) – Global credit markets showed more signs of a thaw on Tuesday and Australia cut interest rates sharply ahead of expected reductions in Europe this week, but the deep freeze in bank lending appeared far from over.
U.S. voters went to the polls to decide who will face the challenge of leading the world’s largest economy out of its worst financial crisis in 80 years. The first polls begin to close in parts of Indiana and Kentucky at 6 p.m. EST (2300 GMT) on Tuesday.
Key bank-to-bank lending rates fell to their lowest in five months as the sector tried to put the worst of the credit crisis behind it, while EU leaders pressed for an overhaul of financial market rules that were seen lacking as the current turmoil spread around the globe.
German Chancellor Angela Merkel demanded world leaders agree quickly on new rules for financial markets.
“It mustn’t take years, it must be done in months,” Merkel said in Berlin.
European Union finance ministers backed proposals for a reform of the G8 club of major industrial nations and an end to the self-regulation in global financial markets that critics say caused the credit crisis.
European leaders such as British Prime Minister Gordon Brown and French President Nicolas Sarkozy want a “Bretton Woods”-style reworking of supervision of global capital markets.
Bretton Woods, a meeting of allied nations in July 1944, established systems and institutions to regulate global money and finance after World War II.
Australia’s bigger-than-expected 75 basis point rate cut followed cuts in the United States, China and Japan last week. Britain and the euro zone are expected to follow suit on Thursday with half point reductions, or maybe more.
Japan’s Nikkei rose 6.3 percent to a two-week high, while Europe’s FTSEurofirst 300 index was last up 3 percent. In the United States, the Dow rose 2.5 percent.
CREDIT CRUNCH
Recession, which authorities have tried to temper with trillions of dollars in bank bailouts, cash thrown into money markets and economic pump-priming measures, looms ever larger.
In yet another sign that the credit trauma has spread throughout the economy, new orders received by U.S. factories took a surprisingly steep tumble for a second month in a row during September, according to a Commerce Department report.
“Each of the big developed economies now is either in a severe recession or well on the way,” said Rory Robertson, interest rate strategist at Macquarie in Sydney.
Australia’s central bank said there was significant weakness in major economies in explaining why it cut rates to 5.25 percent, the lowest since March 2005.
The closely watched bank-to-bank cost of borrowing dollars eased slightly in London, although analysts said that largely reflected central banks offering liquidity to money markets, not commercial banks lending to each other.
Overnight deposits at the European Central Bank hit a record high, showing banks are still hoarding their cash.
The credit crunch, which stemmed from a collapse in the U.S. housing market, has prompted banks to clam up on lending to each other, businesses and households for over a year now.
On Monday, the Federal Reserve said most U.S. and foreign banks had tightened lending standards across the board in the last three months.
Synchronized rate cuts by central banks and emergency government packages worth some $4 trillion may have prevented a banking sector meltdown, but the world economy is in poor shape.
U.S. ELECTION BOUNCE?
These conditions present a huge challenge for either Democrat Barack Obama or Republican John McCain.
Obama leads McCain in five of eight key battleground states as polls opened, according to a series of Reuters/Zogby polls released on Tuesday.
Obama advocates a second stimulus package to jump-start the U.S. economy. Valued at $175 billion, the plan would include funding for infrastructure and a round of tax rebates.
McCain wants a $300 billion housing plan that would use some of the funds from the recent $700 billion Wall Street bailout package to buy up troubled mortgages.
“The fact is, the passage of the U.S. election might actually come as a relief to the market rather than uncertainty, as once the election is done, the political spectrum of the U.S. will be quite clear for the next four years,” said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.
Japan’s economy has joined much of the developed world in a recession, economists polled by Reuters say, with GDP seen contracting for a second consecutive quarter as the financial crisis hits exports and capital investment.
Underscoring the widening effects of the credit crisis, German luxury car maker BMW abandoned its 2008 earnings forecast and cut production after a 60 percent plunge in quarterly profit.
On Monday, automakers reported that sales in the United States, BMW’s biggest market, fell nearly 32 percent in October, to their lowest in more than 25 years.
European banks and insurers warned of tough times ahead as more writedowns and rising bad debts hit profits.
UBS, Royal Bank of Scotland and reinsurer Swiss Re all said they face more writedowns of toxic assets or other losses because of accounting rules in the current quarter, and showed the financial crisis is causing more pain for consumers and businesses.

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