View Full Version : Financial Havoc Wallops U.S. Dollar And Stocks

09-15-2008, 10:08 AM
GLOBAL MARKETS-Financial havoc wallops US dollar and stocks

* High-grade debt, gold, yen in demand on bank industry storm
* Focus turns to Fed policy decision on Tuesday


By Kevin Plumberg
Reuters, Monday September 15 2008 * Investors flee for safety after Lehman buyout talks fail

HONG KONG, Sept 15 (Reuters) - The U.S. dollar tumbled and Treasury debt and gold prices jumped on Monday after talks to sell Lehman Brothers faltered, leading to grave uncertainties about other banks and shaken confidence in the financial system.

Stock markets in Australia, Singapore and Taiwan dropped between 1 to 2 percent as investors excised any trace of risk in their portfolios, loading up on investment-grade debt as consolidation in the financial sector sent shockwaves through almost all asset classes.

After a tumultuous weekend in which Britain's Barclays Plc pulled out of the bidding for Lehman, putting the bank on a path to bankruptcy, an extraordinary Sunday trading session in the $455 trillion derivatives market opened in the United States so dealers could limit the damage from the fallen giant.

Most major Asian equity markets were closed for public holidays but whatever traders that were around followed a simple dictum: seek safety first and ask questions later.

The Swiss franc and yen, currencies associated with stability in times of duress, strengthened, especially against the dollar, which reeled as some in the market speculated the Federal Reserve may have to cut interest rates on Tuesday when it meets to shore up the economy from financial fallout.

Investors may have to adjust their views on the financial sector since the U.S. government refused to back a Lehman deal the way that it did with JPMorgan Chase's purchase of Bear Stearns six months ago. Events seemed to show the private sector will have to sort itself out.

Bank of America is in advanced talks to acquire Merrill Lynch & Co Inc, people briefed on the matter told Reuters.

"Presumably the most important reason to teach Wall Street this lesson is that they will change their behavior, and not take the decisions that are reliant on a public bailout," said Alan Ruskin, chief international strategist with RBS Greenwich in Greenwich, Connecticut. "For many, but not all, this is an impossible lesson to learn in the middle of the worst financial storm since the Great Depression," he said in a note.

The dollar dropped 1.5 percent against the yen at 106.29 yen and was off 1 percent against the Swiss franc to 1.1189 francs.

The euro rose by a cent against the dollar in thin trade to $1.4321, up 0.7 percent from late Friday in New York.

In the spot market, gold rose 2.6 percent to $783.15 an ounce.

U.S. Treasury yields fell sharply in early Asian trade on Monday and Eurodollars surged as concerns about the stability of the U.S. financial system sparked talk of emergency liquidity measures by the Federal Reserve or even a cut in interest rates.

The Fed is expected to accept as collateral a wider array of securities, including equities, the Wall Street Journal reported.

The yield on the policy-sensitive two-year Treasury note hit a five-month low of 1.96 percent, with the price up 15/32. The 10-year yield was also at the lowest since April, at 3.57 percent compared with 3.72 percent late on Friday.

"It appears that Lehman will file for bankruptcy and the risk of an immediate tsunami is related to the unwind of derivative and swap-related positions worldwide in the dealer, hedge fund, and buyside universe," Bill Gross, the chief investment officer of Pacific Investment Management Co (Pimco), told Reuters. Pimco oversees more than $812 billion in assets.

Australia's benchmark S&P/ASX 200 index fell 1.4 percent, weighed by shares of the country's top banks such as Commonwealth Bank of Australia and Macquarie Group Ltd

Taiwan's TAIEX, the only stock market open in north Asia, dropped 2.5 percent to the lowest since November 2005.

Singapore's Straits Times index was at the lowest since October 2006, down 1.6 percent.

European and U.S. equity markets would very likely open lower. U.S. stock index futures pared pointed to a steep drop when trading begins on Monday, with S&P 500 futures down 38 points, or 3.05 percent.

While the fate of the U.S. financial system loomed in investors' minds around the world, initial reports that the passing of Hurricane Ike through country's energy production centre had not severely damaged infrastructure in Texas saw benchmark oil prices fall to a six-month low below $99 a barrel.

"The oil market is selling off because the early indications show Ike didn't do as much damage as feared," said Chris Jarvis, senior analyst at Caprock Risk Management. "That said, this sell-off could prove to be a bit premature, since it could be a while before things get back to normal."

Oil fell $1.58 to $99.60 a barrel after falling as low as $98.46 -- the lowest since February 26 -- adding to a steady downward trend in prices since mid-July's peak of over $147 a barrel as evidence mounts that high energy costs and a weakening economy are cutting into fuel consumption.