Tuesday, September 16, 2008

Stocks Down Again in Europe; World's Central Banks Pump Billions Into Markets, Wall Street Poised for Another Selloff

UPDATE, 10 a.m. Eastern: The Dow has reclaimed some of its earlier losses. At 9:58 a.m. Eastern the Dow was about 110 down from the opening bell.

The Dow dropped 158 points in the first nine minutes of trading this morning as Wall Street investors weighed the future of AIG and a key Federal Reserve announcement today that may include an interest-rate cut.

The Dow Jones Industrial Average was off 158 points at 9:39 a.m. Eastern.

The Federal Reserve is expected to make an announcement from Washington at 2:25 p.m. Eastern concerning its target for the federal funds rate. What that announcement will be is anybody's guess.

Market Watch reports:

"The economic and financial environment will scarcely resemble the one at their previous meeting in August, just six weeks ago," wrote Michael Hanson, an economist for Lehman Bros., who is predicting a quarter-point cut on Tuesday, followed by two further cuts in the next six months. "The recent shocks to the financial markets are unprecedented."

It's not just the financial instability; it's also the worsening economy. With the unemployment rate shooting up to 6.1%, "the downside risks to growth likely have risen substantially in the Fed's eyes," Hanson said. The more the financial market suffers, the more the real economy will feel the impact through reduced credit. In turn, a weaker economy will just make Wall Street problems worse.

The Guardian reports that central banks around the world are trying to ease the financial crisis by infusing billions of cash into the system:

Central banks pumped vast amounts of extra funds into world financial markets for a second day on Tuesday in an increasingly fraught effort to contain the fallout from the crisis sweeping Wall Street's biggest firms.

From Sydney to Frankfurt, central banks injected billions of dollars of emergency funds to stop money markets from seizing up but even that could not prevent a surge in the cost of borrowing between banks, in cases on a scale unseen even when the global credit crunch hit in earnest in August 2007.

Stocks fell again, with Europe's FTSEurofirst index hitting a 3-year low at one stage as investors fretted over events on Wall Street, where Lehman Brothers, once thought too big to fail, filed for bankruptcy protection on Monday, and where another giant, insurer AIG, is seeking survival help.

"It's clear that this financial market crisis is the worst worldwide in decades -- and it is not over," Germany's finance minister, Peer Steinbrueck, told parliament.
The European Central Bank injected 70 billion euros ($98.09 billion) into money markets on Tuesday, after 30 billion the day before.

Demand from banks for Tuesday's funds, a measure of how much other sources of liquidity are drying up, topped 100 billion.

In Britain, the Bank of England injected 20 billion pounds ($35.21 billion), after five billion on Monday. Demand was three times the amount of extra liquidity offered on Tuesday.

The Guardian reported today that the Reserve Bank of Australia to pump nearly A$1.8 billion ($1.5 billion) into the banking system in its second injection in two days. The Reserve Bank of India added almost 60 billion rupees ($1.32 billion) through a refinance operation, its biggest injection in at least a month. Hong Kong, South Korea, Taiwan, New Zealand and Indonesia all offered verbal reassurances, as did governments in Europe. Russia's central bank injected a record $14 billion on one-day funds.

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