The uncertainty over whether the US Congress could revive the $700bn bailout for banks' toxic debt, and the subsequent Wall Street crash, casts a shadow over global stock markets.
Markets are spooked, but they are no longer running scared
The uncertainty over whether the US Congress could revive the US$700 billion (Dh2.6 trillion) bailout for banks' toxic debt, and the subsequent Wall Street crash, cast a shadow over global stock markets yesterday. The Asian markets were the first to open and fell sharply in early trading. The Japanese Nikkei market finished 4.12 per cent lower.
Remarkably, the rest of Asia recovered after a shaky start. While the Hong Kong and Singapore markets also opened down significantly - the Hang Seng index fell 1,000 points - belief spread that the US Treasury's rescue package would be passed this week and markets rallied. There was also suspicion that government authorities were buying shares. When Hong Kong closed the Hang Seng had posted a gain of 0.76 per cent, while Singapore was virtually unchanged.
Peter Lai, a director with DBS Vickers in Hong Kong, said Asian markets had realised the bailout was not doomed after all. "If you watched the congressional vote last night, you would know that the rescue plan got stuck essentially because of dirty politics," he said. "Expectations are high that the bailout will be approved soon with amendments and that should spur a big rally." Usually the next major markets to open are the GCC countries but, perhaps fortunately for them, they were closed for the Eid al Fitr holiday, and will not reopen until Sunday. As a result, the next exchanges to trade were in Europe.
Russia's two markets were suspended in the morning - one of them within 16 seconds of opening before large sell-offs, and the other did not open for trading until midday because of fears of substantial falls. Since the global crisis began several weeks ago, the Russian markets have been repeatedly suspended because of crashes. "This is capitalism, Russian style," a Moscow-based banker observed. Western Europe followed the pattern set by Asia of falling, though not as far, and then recovering to finally post a healthy gain. The London FTSE 100 index fell nearly 150 points in the first few minutes of trading, but from then on it steadily recovered, and closed up 1.74 per cent.
Darren Winder, equity strategist at Cazenove, said his assumption was that some form of agreement on the bailout had been reached, which explained the positive sentiment. "It's a softish day," he said. "Equities are now getting to extreme valuations where fundamentally there is an awful lot of value." However, banking stocks were still hammered initially, with Royal Bank of Scotland falling more than five per cent on concern that it was overburdened with debt after its purchase of Dutch bank ABN Amro last year.
Fears were heightened because it bought the bank in conjunction with Spanish bank Santander and Fortis, the Belgian-Dutch bank that was nationalised on Monday because of its debt. However, the stock recovered like the rest of the market and closed down only 1.1 per cent. There were no more bank nationalisations in Europe yesterday, but a bailout was arranged for the Belgian-French bank Dexia after its shares fell by a third on Monday. The French, Belgian and Luxembourg governments agreed to lend it ?6.4bn (Dh34bn) to keep it afloat.
European bonds dropped for the first time in three days as confidence that the billion-dollar bank-rescue package would stem the falls boosted stocks, reducing demand for safer assets. US legislators "may have been surprised by the extent of the fall in equity markets on Monday", said Edmund Shing, strategist at BNP Paribas in Paris. "They may have to make further amendments, to get the 12 votes necessary. They have to be seen to be helping Main Street as well as Wall Street."
With the prospect of greater confidence in equities, conditional on the US bailout being passed, demand for the safer investment, but lower returns, of bonds will fall. There is also widespread speculation that the European Central Bank will resist pressure to cut interest rates this week and remain focused on inflation, which would reduce bond demand further. Bonds soared earlier in the week because of demand from stockholders, which pushed returns to their lowest level since March.
"The market is hopeful something will get passed," said Orlando Green, a fixed-income strategist in London at Calyon, a unit of Credit Agricole. "The ECB will continue to focus on inflation, as there isn't enough reason for them to blink yet." Bonds will decline as "we go past the uncertainty," Mr Green said, and the reduced demand will push up the return buyers can expect. The return on European bonds rose slightly yesterday, reflecting reduced demand.
"All the turmoil is driving yields lower and our strategy is to remain bullish on bonds," said Michael Markovic, a senior fixed-income strategist in Zurich at Credit Suisse Group, Switzerland's second-biggest bank. While Europe was still open, but before Wall Street opened, George W Bush, the US president, and presidential candidates Barack Obama and John McCain made statements emphasising that the bailout package needed to be passed.
Mr McCain repeatedly emphasised that "inaction is not an option". With heavyweight political support behind the bill in evidence, the NYSE opened and kept its gains in early trading. By midday the market had posted a gain of 2.85 per cent - this was welcome, but was not even half the losses of seven per cent it had suffered on Monday. It was also boosted by a survey showing consumer confidence was rising faster than expected.
"There's an overarching belief that at some point this week, whether it's Wednesday or Thursday, we'll get something passed by the House," said Arthur Hogan, chief market analyst at Jefferies and Co in Boston. It was a day for steady nerves around the world. By and large, they held. Once again, the spotlight turned to Wall Street. * With agencies email@example.com