Signs of an easing in stress in credit market and a positive close from Asian stocks on Sunday saw the yen fall back against the Euro and high yielding currencies like the AUD and NZD as investor sentiment picked up a little.
Market conditions and sentiment are still fragile. Fears of a global recession are keeping investors on edge.
South Korea has joined the list of counties announcing steps to try and stabilise its markets, which brought some relief to its battered currency. There are also promises of a global financial summit, to be held in the US after the presidential elections in early November.
Money-market rates fell, extending last week’s declines, as governments bailed out banks and policy makers intensified efforts to combat the credit freeze in lending with cash injections.
The London interbank offered rate, or Libor rate, which is the rate that banks charge each other for three-month loans in dollars, slid 36 basis points to 4.06% today (the biggest drop in nine months) The overnight dollar rate declined 16 basis points to 1.51% (the lowest level in more than four years) The three-month rate for euros fell. The Libor-OIS spread, a measure of cash availability, dropped below 300 basis points for the first time in almost two weeks.
Policy makers have redoubled efforts to end the credit crunch that’s threatening to tip the global economy into a recession. Interbank lending evaporated after Lehman Brothers Holdings Inc. filed for bankruptcy on September 15th – shattering confidence among lenders and sending borrowing costs to records.
ING, the biggest Dutch financial-services firm, will get a 10 billion-euro ($13.4 billion) lifeline from the Dutch government after mounting credit-market losses drove the stock to a 13-year low. The government will buy non-voting preferred shares and appoint two representatives to the board, the Amsterdam-based company confirmed yesterday.
European Central Bank President Jean-Claude Trichett said policy makers have put banks “on the path” to recovery by pumping unprecedented amounts of cash into money markets.
“I expect the banks to normalize their relationships, meaning that they start lending to each other and that they lend to their clients,” Trichet said in an interview on French radio RTL yesterday. He also mentioned that the banking system is “on the path to normalization,”
In a meeting with the House of Representatives buget commitee yesterday, Federal Reserve chairman Ben Bernanke, confirmed that more government spending may be needed to combat economic weakness. The dollar strengthened against Sterling on the back of this announcement.
The Federal Reserve lowered its benchmark interest rate by half a percentage point on 8th October to 1.5% in an unprecedented co-ordinated action with other central banks.
As the credit crisis intensified in early September, the Federal Reserve took unprecedented actions, which included rescuing insurer Amercian International Group Inc. (AIG) with an $85 billion loan, later supplemented by $38 billion of additional credit; They backed legislation to spend up to $700 billion on recapitalizing banks and buying distressed assets, and setting up a short-term funding backstop for U.S. companies through commercial-paper purchases.
There is now growing speculation amongst traders that the Federal Reserve are likely to reduce interest rates again in the lead up or during the next Federal Open Market Commitee meeting on 28-29th October. Futures markets are currently predicting a 100% chance of a quarter point reduction and a 46% chance of another half point reduction.
OPEC, the supplier of more than 40% of the world’s oil, plans to cut output for the first time in almost two years, as the worst financial crisis since the 1930s sends crude toward $62.29 a barrel.
Reports confirmed that OPEC is likely to cut by a million barrels a day on 24th October, and will need to announce further reductions to prevent prices falling below $60 a barrel,
The UK economy has “deteriorated dramatically” during the past three months, and top forecasters have suggested that the U.K. economy is already in a recession.
Reports yesterday morning, confirmed that Britain has posted its biggest six-month budget deficit since World War II. The 37.6 Billion-pound short-fall ($65 billion) in the fiscal first half through September, was the largest since records began in 1946. With the U.K. economy facing its first full-year contraction since 1991, Chancellor of the Exchequer Alistair Darling pledged to concentrate on job-creating projects, such as building work. However economists have stated that Tax increases and spending restraint will eventually be needed to fill the hole in the public finances.
The number of people out of work in the U.K. rose sharply in the three months to August by 164,000 compared with the previous quarter -the biggest rise in U.K unemployement for 17 years.
Data released 21st October:
11:00 U.K. CBI Manufacturing Orders
14:00 CANADA Interest Rate Announcement
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- The Pound rallies for a second day against the Dollar as risk appetite returns to the market
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