World markets fall on Lehman, Merrill Lynch news

15 September 2008

PARIS — A feverish sell-off in Europe and Asia turned markets sharply lower on Monday after a double-fisted blow from Wall Street that two of its oldest financial institutions had fallen.

European benchmarks were punished following sharp losses across Asia after news that Lehman Brothers had filed for bankruptcy and Merrill Lynch would be sold to Bank of America.

The FTSE-100 share index was down 4.07 percent in London, the Paris CAC-40 was off 4.5 percent and Germany’s DAX 30 index of blue chips sagged 3.23 percent.

The falls were led by insurance and financial stocks, with shares in French insurer AXA SA down 11.1 percent, Germany’s Commerzbank AG falling 10.55 percent, and Swiss bank UBS AG down 15.4 percent.

Britain’s Barclays, which had considered a combination with Lehman Brothers but walked away, was down 10.2 percent.

"We will have a shakeout today and there will probably be more damage in the afternoon when the US gets going," said Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe in London.

US stocks headed for a sharply lower open: the Dow Jones industrial average futures fell 372, or 3.3 percent, to 11,086; Standard & Poor’s 500 index futures fell 48.00, or 3.81 percent, to 1,210.50; Nasdaq 100 index futures fell 49.25, or 2.8 percent, to 1,730.25.

Meanwhile US bond prices surged as investors fled to the security of government debt.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, plunged to 3.50 percent from 3.72 percent late Friday. The dollar was lower against other major currencies, while gold prices rose.

Europe’s major central banks moved quickly to calm markets Monday, pumping billions of euros and pounds into the financial system. The European Central Bank loaned EUR 30 billion but said it received 51 bids for EUR 90.3 billion (USD 127 billion) on its one-day tender with a bid rate of 4.25 percent — a clear sign that demand for cash is over the top.

Similarly, the Bank of England offered up GBP 5 billion (EUR 6.4 billion) in a three-day auction – but bids were nearly five times higher, at GBP 24.1 billion pounds.

Speaking at an awards ceremony at Frankfurt City Hall, ECB President Jean-Claude Trichet said policymakers must be "extraordinarily alert" for jitters in financial markets, spooked by the credit turmoil that stems from now-toxic subprime mortgage debt.

"It is an ongoing market correction with episodes of high level of volatility, it is what we have experienced since now a long period of time and is going on," he said.

The 158-year-old Lehman Brothers Holdings Inc. filed Monday for Chapter 11 bankruptcy. The company was crippled by USD 60 billion in soured real-estate holdings and unable to find an investment partner to throw it a lifeline.

Officials from the government and various banks failed to find a solution during weekend meetings. During the talks, when Bank of America balked at buying Lehman, the government urged it to buy investment bank Merrill Lynch instead. The USD 50 billion deal stops speculators whose next target after Lehman would have been Merrill, Cantor Fitzgerald’s Pope said.

The moves will create a "firebreak in the financial structure," and once disappointment that Lehman didn’t manage to make a deal has been digested, stocks will start to recover, he said.

"You are going to have a torrid day today, probably tomorrow as well, but then I think people are going to start thinking there’s some opportunity out there to be engaged," he said.

Before that, markets also have to react to a possible restructuring of the world’s largest insurance company, American International Group Inc., expected to make an announcement Monday.

AIG’s troubles a week after its stock dropped 45 percent are perhaps most worrisome for some investors because of the company’s enormous balance sheet – and the risks that its troubles could spill over to its customers. AIG, one of the 30 stocks that make up the Dow industrials, fell 48 percent in pre-market trading Monday.

A global consortium of banks, meanwhile, announced late Sunday a USD 70 billion pool of funds to lend to ailing financial companies, a move geared toward preventing a worldwide panic on stock and other financial exchanges.

The US Federal Reserve chipped in with more largesse in its emergency lending programme for investment banks.

The dollar declined against the euro, which rose to USD 1.4246 from USD 1.4215 late Friday in New York. The pound rose against the dollar, to USD 1.7945 from USD 1.7937.

Oil again dropped below the USD 100 mark after doing so Friday for the first time since April. Light, sweet crude dropped USD 5.42 to USD 95.46 in premarket electronic trading on the New York Mercantile Exchange after damage to Gulf of Mexico oil infrastructure from Hurricane Ike was less than investors feared.

Asia’s biggest stock exchanges in Japan, Hong Kong and South Korea were closed for holidays, but every market open closed deep in the red.

India’s Sensex tumbled 3.4 percent, Taiwan’s benchmark plummeted 4.1 percent and Singapore dropped 3.2 percent.

But there could be more turmoil to come when the US wakes up. Aurelio Maccario an economist with UniCredit in Milan said the reaction in Europe and Asia has been more contained than it could have been.

"Everyone is waiting for the US markets to open, let’s see how the day unfolds," he said.

[AP / Expatica]