New Overnight Developments Abroad: Lehman Files for Bankruptcy and Merrill Lynch Sold to Bank of America

September 15, 2008

Stock markets plunged in Asia and Europe.  India -3.7%.  Philippines -4.2%.  Singapore -3.3%.  Indonesia -4.7%.  German Dax -3.3%.  Paris Cac -4.4%.  British Ftse down 3.6%.  Switzerland -2.9%.  Italy -3.5%.  Japan closed for Respect for the Aged Day.  China and Hong Kong closed for Mid-Autumn holiday.

Sovereign bond prices soared.  10-year yields dropped at least 15 basis points in the U.S., Euroland, Britain, Australia and Canada.

The dollar fell 2.5% against the yen and by 1.2% against the Swiss franc, but it climbed 1.6% against the Australian dollar and 1.2% against the kiwi.  The U.S. currency initially sold off to 1.4479/euro but recovered to show no net change against the euro after Fed and other central banks took steps to reduced money market strains. The dollar is up 0.2% against sterling and 0.7% higher against the Canadian dollar.

Oil plunged 4.1% to $97.03/barrel as concern about a financial sector-induced global recession outweighed news of damage to Gulf of Mexico facilities.

Gold climbed 2.1% to $780.80 but remains 24.4% below 2008 peak.

The Fed widened the range of acceptable collateral in lending to securities firms and lifted the amount of bonds it will buy at auction.  The ECB, Bank of England, Reserve Bank of Australia and Swiss National bank injected extra money market liquidity.  Other central banks issued verbal assurances.  A consortium of commercial banks committed to creating a $70 billion borrowing facility.  Greenspan warned other U.S. financial firms may fail.

China cut its one-year yuan lending rate by 27 basis points to 7.20% and reserve requirements for all but the biggest banks by a full percentage point to 16.75%.  This easing was done sooner than expected and before clear-cut evidence of a slowdown in growth.  Officials had already stopped the yuan’s uptrend.

Hourly labor costs in Euroland decelerated to 2.7% y/y in 2Q08 from 3.5% in 1Q. Italian harmonized CPI inflation was confirmed at 4.2% in August, most since at least 1997.

Britain’s CBI revised projected GDP growth downward to 1.1% in 2008 and 0.3% in 2009 from prior forecasts of 1.7% and 1.3%, respectively.

Australian housing starts fell 3.7% in 2Q08, almost twice the forecast drop.

New Zealand’s service sector index worsened to a sub-50 score of 47.9 in August from 48.9 in July but remained above June’s 45.6 reading.  But consumer confidence in New Zealand improved sharply on interest rate reductions to 44 in August from 28 in July.


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