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THE WORLD IS FLAT
THE crisis in the credit markets has forced policymakers in the Western world to opt for long-forgotten policy tools. The British government has announced that it would be injecting capital into its banks, a step akin to partial nationalisation. Amazingly even a very rightwing US administration is now contemplating following the UK example.
Some markets are taking a certain amount of comfort from these moves though the response is by no means uniform and the sentiments remain very fragile. Equity markets in Europe appeared to be responding to these policy measures and to the coordinated interest rate cuts by central banks over the past few days, but the situation in credit markets remained critical on Thursday. European shares surged on Thursday, earlier in the day, as investors resumed purchases in the hope that the rate cuts will finally restore stability to the financial markets. Later on Thursday evening, however, shares were trending down.
Investors in Asia did not seem as optimistic. Central banks in Hong Kong, South Korea, Indonesia and Taiwan slashed interest rates, joining the ranks of six other economies that announced a similar move on Wednesday. The impact of the move was mixed. Hong Kong shares rose over 3%, South Korean shares gained marginally, while Taiwanese shares ended over 1% down.
In the US, the Dow Jones Industrial Average was up over 1% in early trade, as IBM — the largest computer services firm in the US — reported quarterly earnings higher than market expectations. But it gave up the gains and later slipped into negative territory. Dow sank below the 9,000-mark and Nasdaq dipped below the 1,700 level for the first time since 2003. Dow fell 267 points, while Nasdaq shed 41 points at 00.37 IST. IBM's results have raised hopes that corporate earnings for the September quarter may not have been too badly affected by the turmoil in financial markets.
Meanwhile, the cost of three-month dollar loans in London, as indicated by the London interbank offer rate, rose to a near 10-month high of 4.75%. This is a clear signal that despite co-ordinated interest rate cuts in key markets, banks remain wary of lending. The European Central Bank loaned banks a record $100 billion in overnight dollar funds, much of it at 5%, sharply down from 9.5% the previous day. Policymakers' efforts to restore normalcy is being hampered by a steady trickle of bad news. Iceland's government took over the nation's biggest lender Kaupthing Bank in a move to keep the banking system functional.
Infy result holds the key
The US government also plans to buy stakes in troubled financial institutions covered under the $700-billion bailout package. AIG may need $37.8 billion of funds in addition to the $85 billion it has already received so far. Infosys Technologies' second-quarter earnings and the guidance for the full year will decide the trend on Friday. Markets were closed on Thursday on the occasion of Dussera. Brokers say disappointing quarterly numbers from key companies could aggravate the selling pressure. Benchmark indices are already 45% off their record highs seen in January.
Some markets are taking a certain amount of comfort from these moves though the response is by no means uniform and the sentiments remain very fragile. Equity markets in Europe appeared to be responding to these policy measures and to the coordinated interest rate cuts by central banks over the past few days, but the situation in credit markets remained critical on Thursday. European shares surged on Thursday, earlier in the day, as investors resumed purchases in the hope that the rate cuts will finally restore stability to the financial markets. Later on Thursday evening, however, shares were trending down.
Investors in Asia did not seem as optimistic. Central banks in Hong Kong, South Korea, Indonesia and Taiwan slashed interest rates, joining the ranks of six other economies that announced a similar move on Wednesday. The impact of the move was mixed. Hong Kong shares rose over 3%, South Korean shares gained marginally, while Taiwanese shares ended over 1% down.
In the US, the Dow Jones Industrial Average was up over 1% in early trade, as IBM — the largest computer services firm in the US — reported quarterly earnings higher than market expectations. But it gave up the gains and later slipped into negative territory. Dow sank below the 9,000-mark and Nasdaq dipped below the 1,700 level for the first time since 2003. Dow fell 267 points, while Nasdaq shed 41 points at 00.37 IST. IBM's results have raised hopes that corporate earnings for the September quarter may not have been too badly affected by the turmoil in financial markets.
Meanwhile, the cost of three-month dollar loans in London, as indicated by the London interbank offer rate, rose to a near 10-month high of 4.75%. This is a clear signal that despite co-ordinated interest rate cuts in key markets, banks remain wary of lending. The European Central Bank loaned banks a record $100 billion in overnight dollar funds, much of it at 5%, sharply down from 9.5% the previous day. Policymakers' efforts to restore normalcy is being hampered by a steady trickle of bad news. Iceland's government took over the nation's biggest lender Kaupthing Bank in a move to keep the banking system functional.
Infy result holds the key
The US government also plans to buy stakes in troubled financial institutions covered under the $700-billion bailout package. AIG may need $37.8 billion of funds in addition to the $85 billion it has already received so far. Infosys Technologies' second-quarter earnings and the guidance for the full year will decide the trend on Friday. Markets were closed on Thursday on the occasion of Dussera. Brokers say disappointing quarterly numbers from key companies could aggravate the selling pressure. Benchmark indices are already 45% off their record highs seen in January.
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