by Samuel Allen
The North Atlantic economies were in turmoil yesterday afternoon with the Dow Jones Index plummeting 4.3%, Gold hit a record high, the Swiss government intervened and slashed their deposit rate to as close to zero as they can go whilst the Japanese intervened on their currency by selling Trillions of Yen into the market in a last ditch attempt to weaken their currency.
These market conditions precipitated a midnight selloff, Asian stock markets plummeted as investors sold riskier assets amid fears the US is heading back into recession and Europe’s debt crisis is worsening.
Japan’s Nikkei 225 stock average slid 3.4% to 9,328.74, Hong Kong’s Hang Seng dropped 4.4 % to 20,912.60, South Korea’s Kospi index shed 3.6 % to 1,945 and Taiwan’s benchmark slumped 4.4 % to 7,952.98. Australia’s benchmark dropped 4% to 4,103.10.
Shortly after the London open this morning bank shares plunged across the board with Italian banks falling by nearly 30%, Unicredit and Intesa Sanpaolo have seen the biggest drops which brings it to just 0.32 times their book value, according to Thomson Reuters data.
Banks in the UK didn’t survive unscathed with Lloyds shares suspended in early trading after falling more than 10% as investors took fright when the bank reported a £3.25bn loss for the first half of the year.
The UK Government’s stake in the bank started off the day worth close to £11bn, but after the collapse in the share price the 41pc holding was valued at the close at £9.67bn, a loss on the day of about £1.1bn.
A cloud has formed over all European nations, many believe the European bailout fund isn’t nearly enough to protect them from defaulting on rising debts. Some say they would need close to 2 Trillion Euros to regain the confidence of the markets. The market for Italian debt is subdued and interest rates on their debt is rising, if something isn’t done quickly then they could face a fiscal catastrophe which would make Lehman brothers look like a child’s tantrum.
The reaction in the north Atlantic currencies has been muted so far today. Currency volatility is subdued with movements erratic. Anything could happen from here, clients with large exposures to any currency pairs should at least have protective stop orders in place to mitigate any further volatility in the foreign exchange markets.
Risk aversion is has presented some very good opportunities to buy currencies like the Australian Dollar, New Zealand Dollar and Euro. The pound has recovered against the Australian Dollar by around 5% in the past few days.
Markets are keenly anticipating this afternoon’s Non-Farm payrolls release, the number of pay rolls in America outside of the farming sector is hotly anticipated by financial analysts and traders throughout the world as a gauge on the state of the global economy. Clients with exposure to any currency should be wary of this figure and have stop orders in place to protect themselves against erratic moves in the market.
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