G7 to meet on world financial crisis
abs-cbnNEWS.com | 10/10/2008 6:42 AM
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NEW YORK/WASHINGTON - Fear-driven selling sent US stocks plummeting to five-year lows on Thursday, on the eve of a G7 meeting of economic powers to try to halt a global spiral of financial distress and slowing growth.
The Dow dived below 8,600 for the first time since May 2003 and the S&P 500 dropped 7 percent as credit markets buckled. Both the Dow and S&P 500 have now lost more than 20 percent over a seven-day down streak.
"The market is in a phase now that it doesn't believe in anything," said Sasha Kostadinov, a fund manager and analyst for Shaker Investments in Cleveland, Ohio. "I don't know what will turn the sentiment."
The punishing stock market decline in the final hour of trade added to pressure on US policy makers to do more to stem the crisis -- even after approval of a $700 billion bailout fund and an emergency rate cut by the US Federal Reserve over the past week.
At the center of a financial crisis now almost a month old, credit markets remained distressed. With banks desperate to protect capital, the interbank cost of borrowing dollars rocketed. Three-month interbank rates for dollar loans hit their highest level of the year.
In its next move to stem the crisis, the US Treasury plans to start injecting capital in US banks as soon as the end of October, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking.
That partial nationalization of American banks would represent an enlarged role for the US government as the lender and investor of last resort, and would follow moves by European governments to shore up the capital of struggling financial institutions there.
White House chief economic advisor Edward Lazear said injecting capital into the financial system could be quick and effective. "It's not going to take us a long time to do this. The markets will be reassured in very short order," he said.
At its Thursday close of 8,579, the Dow Jones industrial average had lost 39 percent over the past year.
"It's a self-feeding frenzy -- you go to sleep and hear Japan is down, you wake up and hear Europe is down then you come in to work and markets here are down," said Thomas Russo, partner at Gardner Russo Gardner.
There was no sign of an end to that grinding cycle of loss. Nikkei futures that are traded in Chicago closed down 7 percent from their close Thursday in Osaka. European stocks had lost more than 2 percent on Thursday.
"This is not the bottom yet. We need to have more bad news discounted in the marketplace, we need to officially hear we are in a recession, we need to have better visibility on company earnings and the credit market needs to show signs of relief before things get better," said Keith Wirtz, chief investment officer of Fifth Third Asset Management.
Earlier, South Korea and Taiwan cut interest rates on Thursday following the coordinated cuts on Wednesday by major central banks including the US Federal Reserve. Japan was considering other measures in the face of new recessionary signals.
Finance ministers and central bankers from the Group of Seven major industrial nations will meet in Washington on Friday amid expectations that the group will present a united front on policy in the face of a crisis that has toppled banks in Europe and the United States and raised concern about whether the global economy can avoid deep recession.
"Various countries have done bits and pieces. Nobody has done all of them," said David Mackie, head of Western European economic research at JPMorgan.
"It's not entirely obvious that these measures are turning the tide," Mackie said. "At the end of the day, if you socialize enough of the financial system, it has to work."
One option for policymakers could be for other countries to follow Britain's pledge to guarantee short-term interbank lending.
Uncle Sam as shareholder?
The Treasury's bank recapitalization plan was an option included in the $700 billion rescue plan approved last week in which the government will buy bad loans from financial institutions in the hope that it will jump-start lending.
Until now, US policy has focused on a contentious plan to buy up distressed assets from banks. But many analysts have said that a US government move to shore up the capital position of hobbled banks would be a more direct way to break the logjam in credit markets that has shut down new borrowing for consumers and businesses.
The United States would be following the lead of Britain, which said on Wednesday it was prepared to inject 50 billion pounds ($87 billion) of taxpayer money into its banks.
US markets faced additional uncertainty after a ban on short-selling of financial stocks expired at midnight on Wednesday.
Financial stocks came under withering pressure. The S&P financial index dropped almost 12 percent.
Short-sellers bet on falling stock prices and have been blamed for driving share prices lower, though advocates of the tactic say they were first to point out underlying weakness in financial firms.
Shares in General Motors Corp shares fell to their lowest level since 1950 as concerns mounted that an industry decline that started in the United States was spreading to faster-growing markets overseas. The 31 percent drop in GM shares added to the gloom about a recessionary spiral in the US economy.
"Part of it is continual fear of economic contraction, which is driving deflationary fears, and you take down General Motors and people are looking at the ripple effect," said Greg Orrell, portfolio manager of the OCM Gold Fund in Livermore, California.
