Banks Are at the Centre of Stock Markets Crisis; Market Watch

Daily Post (Liverpool, England), March 19, 2008 | Go to article overview

Banks Are at the Centre of Stock Markets Crisis; Market Watch


Byline: BY ALEX TURNER

THE world's stock markets endured another anxious day yesterday as the United States Federal Reserve moved to slash US interest rates by 0.75% and UK inflation figures rose sharply.

Monday's positive finish by the Dow Jones Industrial Average, buoyed by expectations of the US rate cut, boosted early trading in Europe.

London's FTSE-100 Index, which closed on Monday night at a two-year low of 5,414, leapt above 5,500 in early trading yesterday morning.

By the end of the day it had clawed back 191 of the 217 points lost on Monday to finish on 5,606.

Monday had seen the FTSE-100 Index fall nearly 4%, a drop that followed similar falls in Asia and was largely matched by other European exchanges.

The trigger for this latest market turbulence was the crisis at Bear Stearns, which resulted in the US investment bank being bought by its rival JP Morgan Chase for a cut-price pounds 116.4m.

Bear Stearns was heavily exposed to the mortgage-backed investments hit by the credit crunch and last week rumours of problems at the business swept the market, leading to a cash crisis at the firm.

Billionaire British businessman Joe Lewis, whose Tavistock Group owns Tottenham Hotspur as well as a host of other worldwide investments, said he has lost more than pounds 500m after the cut-price buyout of the bank.

The US investment bank is being seen as the American equivalent of Northern Rock, and yesterday the next stage of the effects of the Newcastle-based bank's nationalisation became clear when it announced that 2,000 jobs would be lost over the next three years. However, most of the cuts would take effect this year as the bank reduces its workforce by 30%.

And just as it had been the banks that had borne the brunt of Monday's market falls, led by Halifax Bank of Scotland and Barclays, it was also the banks that led Tuesday's recovery.

Alliance & Leicester finished up 8% and HSBC rose 7%, while HBOS and Barclays gained 4% and 5% respectively.

ANDREW Morris, who heads up Rathbones investment management business in Liverpool, believes that trading will remain turbulent until the size of the banking crisis becomes clear.

"I still don't feel that we know the true extent of the banking crisis," he said.

"We can expect continued volatility in the market until we get a clear indication of how deep the banking crisis is, but we have had a clear display that the central banks are there to be supportive."

Swift action over Bear Stearns and last night's 0.75% US interest rate cut, has seen the Federal Reserve try to get on the front foot.

"It is a message of support to the banking system as a whole, a willingness to keep the economy moving forward," said Mr Morris.

"To a lesser degree we saw that with the Bank of England on Monday. It's quite a co-ordinated approach from central banks.

"It's clear to see how pro-active the Fed has been. They have dealt with Bear Stearns in a weekend when Northern Rock seemed to drag on for months. We have seen it in the past that the Americans have been very quick to react."

But he sounded a note of caution for those wanting the Bank of England to follow the lead of its American counterpart.

"Over here, more people are seeking advice on their mortgages and we are seeing inflationary pressures in their shopping baskets and energy bills.

"That does create a dilemma for central banks when looking at interest rates, they are in a very difficult position."

The US Federal Reserve has now slashed interest rates from 5.25% in September, as the bank seeks to divert the economy off its path which seems headed for recession - if it is not already there.

But last night's cut was not as much as markets had been hoping for, after speculation of a 1% cut had buoyed markets throughout the afternoon. …

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