Financial crisis spreads across boundaries
07 Oct 2008
The global crisis deepened as it spread to other European countries as well on Tuesday. European equities fell further on Tuesday after a brief rally was wiped out by fresh worries about the health of the banking sector. Royal Bank of Scotland shares plummetted on talk that the bank had approached the UK government over a possible capital injection. Shares in RBS tumbled 30 per cent to 129 pence, having fallen further earlier to a day's low of 90 pence. Iceland's financial authorities have taken over Landsbanki, the country's second largest bank.
The proposed US and European government bailouts have not yet helped the credit markets much. The collapse of stock markets worldwide on Monday reflected deepening concerns that government intervention won't be enough to stave off a potentially severe global recession. Stock market strategists feel that recession is unavoidable at this point.
The Dow Jones industrials index fell below 10,000 on Monday for the first time in four years since October 2004 marking a significant psychological low. Wall Street shares tumbled in unison with a sell-off around the world. The blue-chip index plummeted 800 points at one stage, exceeding last week's largest ever one-day points drop of 777. After a strong recovery during the final hour of trading in New York, it closed at 9,955, or 369 points lower than the previous day's closing.
Unified European bailout unlikely
Though rumours still abound, the European Union is less lekly to come up with a US-style bailout package to support its ailing banks. Analysts expect the EU to probably guarantee private deposits in banks across the region to revive public confidence in banks. Ireland was the first country in the region to announce such a measure, offering a blanket guarantee to all bank deposits. Germany has followed suit and guaranteed all private deposits in its banks while other countries may take similar measures. Germany had also stepped in to prevent lender Hypo Real Estate from failing. The Dutch and Belgian governments pitched in to bail out Fortis through capital infusions.
Asian stocks mixed in Tuesday's trading as Australian cut surprises all
Australia has responded to the growing financial crisis by cutting its interest rates by 100 basis points. Australian shares reversed earlier losses and finished 1.7 per cent higher after a surprise and dramatic rate cut by the Reserve Bank of Australia, the country's central bank. The recovery came after the S&P/ASX 200 Index's 3 per cent drop in the morning session.
Australia's biggest interest rate cut in 16 years on Tuesday helped other Asian markets recover early losses on speculation that other central banks would follow suit in a possibly coordinated move to combat the global credit crisis.
The one percentage point cut in the Australian central bank's benchmark cash rate to 6 per cent was double the size analysts had expected and the biggest single cut since May 1992. The Australian move is expected to insulate the country's banks, households and firms from the meltdown in global financial markets.
Investors the world over have high hopes of the Bank of England cutting rates at its policy meeting this week. They are also expecting cuts from the US Federal Reserve and the European Central Bank in the near future.
Meanwhile, Japan's Nikkei 225 Average fell 3 per cent to a five-year closing low as panic over the global financial crisis prompted investors to dump stocks. The benchmark index had fallen more than 5 per cent in the morning but trimmed those losses on bargain hunting and after the Australian central bank's rate cut. Automakers were the worst hit with Toyota Motor and Nissan Motor both down over 4 per cent.
South Korea's Kospi reversed early losses to close half a per cent higher, led by exporters who could benefit from a weaker won. Some defensive telecommunications and consumer stocks also advanced. Samsung Electronics, the world's No.1 memory chipmaker rose 2.71 per cent, and LG Electronics, the world's No.4 mobile handset maker, climbed 3.9 per cent.
Singapore's Straits Times Index reversed initial sharp losses to close 0.6 per cent higher, with bank issues such as DBS Group swinging into the black. Shares in shipping firm Neptune Orient Lines rose over 5 per cent as investors hoped its bid to buy Germany's Hapag-Lloyd from TUI might be delayed, following opposition from a TUI shareholder.
China's Shanghai Composite Index rebounded from a sharp early slide to close 0.7 per cent lower. Banks and property shares were the leaders. Bank shares bounced after the Industrial & Commercial Bank of China and other top banks sank in early trade to near levels where government investment fund Central Huijin is believed to have bought them late last month, as part of an official rescue plan for the market. This prompted speculation that Central Huijin might soon resume buying.
