Stephen Gunnion
7 October 2008
Johannesburg — PANIC erupted in world markets yesterday with stocks and commodities continuing to take a battering as the credit crisis spread across the globe.
Despite huge injections of funds into financial systems and the widespread bail-out of banks in the US and Europe, other sectors of the world economy were also affected.
The global flight from risk saw the rand weaken to almost R9 against the dollar. It sank 5% to R8,97, before retracing some of its losses. The rand also weakened significantly against the euro and sterling.
Share prices plunged across the board, led by financial counters after a number of countries followed Ireland and Greece's lead and pledged to guarantee private or retail deposits.
Commodity stocks were also hit hard as metals prices remained under pressure due to the prospect of global recession.
The price of oil dipped below $90 a barrel. However, bonds particularly US and euro-zone government debt, benefited from the flight to safety.
The JSE's all share index was 7,3% down at 21022 at the close as resources shares fell 9,6% and the platinum index 10,4%.
In Brazil, the real sank, and stocks fell as much as 15% at one point, forcing the bourse to halt trade twice. Russia's Micex index plummeted 19%, although trading was halted three times.
BoE Private Clients trader Andrew Todd said: "It's been an absolute bloodbath today. It stemmed from the big fall that we saw in the Dow on Friday ... and that filtered through.
"It's just continued concerns over global growth, (and) it's across the board. There's nowhere to hide."
World stocks, measured by the MSCI index of leading stock markets, were down 6,39% by late afternoon. The index was on track to chart its biggest one-day fall to date.
London's FTSE 100 fell 7,9% to its lowest level since 2004, while the Cac 40 in Paris fell 9%. In the wake of Friday's large losses, the Dow Jones industrial average in New York fell almost 4% at the opening to 9919, falling below 10000 for the first time since October 2004.
"This is a stampede," said Valerie Plagnol, chief strategist at CM-CIC Securities in Paris. Plagnol said investors were unnerved by such huge government intervention in capital markets in so short a time.
Although the cost of borrowing overnight funds on international money markets remained close to the targets of central banks, thanks to continued liquidity injections, lending was almost nonexistent in the money markets.
Plagnol said: "The issue right now is to unclog the money market. As long as the money market is not functioning properly we are stuck in this situation."
Money-market rates continued to climb with Libor, the London interbank offered rate that banks charge each other for overnight dollar loans, rising 37 basis points to 2,37%.
Restoring confidence in the financial system and freeing up credit would take time, US President George Bush said as the US government began implementing its $700bn rescue plan signed into law last week.
"The strategy behind the package is to free up credit, is to get money moving, and it's going to take a while," Bush said.
Austria, Denmark and Sweden also agreed to guarantee savers' bank deposits, following the lead of Ireland and Greece last week and Germany at the weekend.
French President Nicolas Sarkozy, who holds the European Union (EU) rotating presidency, issued a statement on behalf of the 27 EU member countries, saying individual countries would do all they could to safeguard the financial system.
On global currency markets, the euro had its biggest one-day drop against the yen since it was introduced in 1999 after European governments pledged bail-outs for troubled banks due to the deepening credit crisis.
"Today smacked of absolute panic in the market," said Dave Gracey, head of foreign-exchange and fixed-income trading at Nedbank Capital.
"Everything but the yen and the dollar got hurt dramatically."
Gracey said that the Australian, Russian, Brazilian and Argentine currencies had been hit particularly hard.
"I do think that the bail-out package and the guarantees the banks are putting into place will filter through. But that's a short term solution.
"We need to get people lending to one another to get the wheels turning again," Gracey said.
Gracey said the forex market was likely to remain illiquid and volatile for the time being, which meant the rand would remain volatile. However, he said the prevailing weakness would make South African exports start to look attractive, and would go some way towards balancing the current account deficit.
Although the credit crisis was far from over, Gracey said his view was that it was "past the middle".
With Reuters
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