Stephen Gunnion
15 October 2008
Johannesburg — GLOBAL markets continued their rebound yesterday, buoyed by the biggest bank rescue in European history and new moves by the US to inject $250bn into the banking sector.
Unveiling plans similar to those outlined by the UK last week and by some European Union countries on Monday, US President George Bush said his government would buy equity stakes in banks in a bid to help thaw credit markets frozen by the housing market collapse.
Shares on the JSE added as much as 5%, while the rand rallied to R8,84/$.
"This is an essential short-term measure to ensure the viability of America's banking system," Bush said. "These measures are not intended to take over the free market but to preserve it."
The US treasury would buy nonvoting preference shares in large banks, with stakes in each limited to $25bn. A ceiling would be placed on the remuneration of bank executives and standards of corporate governance would be introduced.
US Treasury Secretary Henry Paulson said nine banks that he described as "healthy institutions" had agreed to accept government stakes for the good of the US economy.
On Wall Street, the Dow Jones gained 4,3% before losing steam to close down 0,82%, or 76,62 points, at 9310,99. Traders said investors were likely taking some profit following the rally.
After a holiday on Monday, shares in Tokyo surged 14% on renewed attempts to thwart a global meltdown. European shares also continued to rally.
In London, money market rates fell after the US move. The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans slid 12 basis points to 4,64%, the biggest drop since March 17, according to the British Bankers' Association. It was at 4,82% last Friday, the highest level since December.
London's FTSE 100 index was 3,2% higher, while the CAC 40 in Paris added 2,7%.
On the JSE, the all share ended 3,1% higher at 22117 as the resources index gained 11,4%, while the rand retraced some of its gains and was trading at R8,98/$ in early evening trade. Last week, the currency hit a seven-year low of R9,49/$.
A London-based currency dealer, who asked not to be named, said the currency market remained illiquid, exaggerating the rand's movements. Importers and exporters were evident in the market as the rand swung weaker and stronger, he said.
He said the rand was likely to continue mirroring what was happening on the markets in the short term.
"Following the bail-out packages for banks, equities should continue to strengthen and the rand will follow. Nothing locally is likely to affect it," he said.
Chris Meyer, CEO of RMB Morgan Stanley, said while the previous attempts to restore confidence to the global financial system had failed, the move to inject equity into banks and guarantee inter-bank lending appeared to be working.
"Perhaps it took a while for them to find out what was frozen -- the lending between banks due to the crisis of confidence first started in earnest by the default of Lehman Brothers," Meyer said. "Now the UK and US government's are saying: here's some cash, don't hoard it, but start deploying it and get the financial system lending again to oil the wheels of the general economy."
But Meyer said the turnaround on markets this week did not necessarily signal the start of a bull market. "Like any sell-off, a part of it is based on fundamentals and a part is based on fear. There is always a degree of overshoot, or in this case undershoot, based on fear. That part of the sell-off is what has snapped back in the last two days."
He said now that the fear was being removed from the markets, the focus would fall on the fundamental weakness that still plagues global markets and economies and the degree to which the weakness in the global financial system has put growth on hold.
"The rally doesn't go up in a straight line; you cannot go straight back into a bull market because of the economic fallout from the financial crisis that we have seen in the last 12-18 months," Meyer said.
While it looked like emerging markets would escape the turmoil until as recently as about three months ago, Meyer said the slowdown had now spread to markets such as Russia and eastern European countries.
"I think SA will also feel some of the pain. Clearly the rand is where most of the pain has been felt thus far, as well as commodity prices. This could have an impact on our balance of payments and our ability to cut rates as quickly as the market is pricing it in".
With Reuters
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