New Overnight Developments Abroad: AIG Rescued By $85 Billion Bridging Loan From Fed

September 17, 2008

Money markets in Asia remained tight despite the bailout of AIG by the Fed.  The Bank of Japan ($28.6 billion), Reserve Bank of Australia ($3.4 bln) and Reserve Bank of India ($1.0 bln) injected liquidity.  A professor from China called the global financial system “ruptured beyond repair.”

The dollar is mixed.  It rose 0.3% against sterling and the kiwi and 0.4% against the Australian dollar.  It fell 0.5% against the euro and C-dollar, 0.3% against the Swiss franc, and 0.1% relative to the yen.

Asian stocks were mixed, while equities in Europe are higher.  Japan’s Nikkei +1.4%. South Korea +2.7%.  Indonesia +2.0%.  Hong Kong and China -3.6%.  Vietnam -4.1%.  India -2.0%.  German Dax +0.6%.  British Ftse +1.2%.  Paris Cac +0.5%.

Sovereign bond yields higher in Japan (+2.5 basis points to 1.49%) and Europe.  Yield on Treasury futures is also up.

Oil rebounded 3% to $93.86/barrel, while gold firmed 0.7% to $786.1 per ounce.

Central banks not making panicky rate cuts.  The Bank of Japan left its 0.5% target unchanged after unanimous 7-0 vote.  Governor Shirakawa called domestic economy sluggish but also said price risks need to be watched.  AIG rescue considered a positive step.  Bank of England minutes adopted  a more dovish tone but not so much as to point to a rate cut as soon as October.  BOE vote was 8-1.  Besley dropped his call for a rate hike, and Blanchflower doubled his recommended cut to 50 basis points.  Swedish Riksbank minutes revealed that a rate hike this month came after Governor Ingvies broke a 3-3 tie between no change and the increase of 25 basis points.  Reserve Bank of Australia Governor Stevens gave a speech claiming that the domestic financial system is weathering the storm and warning that sustained growth above 2-3% would stoke inflation in Australia.  A top EU official, Juncker, said core inflation in the region is far too high, and one ECB governor, Tumpel-Gugerell, said the Governing Council rules nothing out on rates.

The Federal Reserve reversed its prior stand against bailing out more institutions, making an exception with AIG that was not granted to Lehman.  U.S. taxpayers now could absorb a bill of almost $1 trillion from combined bailouts including of Bear Stearns, Fannie Mae, Freddie Mac, the FHA, and AIG.

British unemployment jumped 32.5K in August, the biggest monthly increase since December 1992.  Average hourly earnings rose by a benign 3.5% y/y in May-July.  That was a tenth more than forecast but conveys a lack of strain.

Also in Britain, the CBI industrial trends survey showed orders weakening sharply to a reading of -26 in September from -13 in August, -8 in July and +1 in June.  The expected inflation score settled back to 23 from 31 in August and 34 in July.  Scant doubt remains that Britain is in recession, and it could be a bad one.

Euroland’s seasonally adjusted trade deficit widened to EUR 6.4 billion in July from EUR 3.5 billion in June and EUR 1.7 billion in May.  A surplus of EUR 0.9 bln was posted in April.  Higher oil prices, which reversed course subsequently, account for this deterioration.


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