Tuesday market wrap up: Global markets continue to stumble

by Tina Kells | October 7, 2008 at 09:17 am

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There was some early recovery in the U.S. markets after Monday’s disastrous decline, but the Dow closed down for the day by more than 500 points, while global markets continued to stumble.

Tuesday morning the U.S. Federal Reserve announced plans to revive the commercial credit market by backing short term unsecured commercial papers which helped the markets to rally early in the day, but the effects were short lived.

The U.S. central bank will lend against a special-purpose vehicle at the targeted federal funds rate. The unit will purchase from eligible issuers three-month dollar-denominated commercial paper at a spread over the three-month overnight- indexed swap rate, according to a statement in Washington today.

The Fed will purchase asset-backed commercial paper, and in cases where the short-term loans are not secured by assets, it will collect fees or other securities.

Rates on commercial paper, or short-term IOUs sold by companies, have soared in recent days as banks lost trust in corporate borrowers. After the Fed's announcement, yields on overnight U.S. commercial paper dropped 74 basis points to 2.94 percent, according to data compiled by Bloomberg. Borrowing for seven days increased 1.25 percentage points to 4 percent.

This news gave some lift to the U.S. markets, but did nothing to calm the storm in the European and Asian markets. Canada, largely said to be insulated from the U.S. economic crisis due to a vastly different banking system than the Americans, saw that myth busted when all the Canadian markets opened with steep declines. The TSX fell nearly 1,200 points before rallying. The TSX closed down 537 points over Monday.

Panicking investors pushed stocks to another gut-wrenching drop in Toronto and around the world yesterday as fears about a global recession intensified amid the spreading financial crisis.

Toronto's main stock index staged its biggest intraday points drop ever – nearly 1,200 points – before rallying back in the afternoon to close down about 573 points, or 5.3 per cent. At the day's lows, the drop of about 11 per cent was second only to the "Black Monday" crash of Oct. 17, 1987.

Things were grim in European markets, despite an early morning rally in reaction to the U.S. Federal Reserves commercial paper buyout announcement. The Euro gained against the U.S. greenback, which was good news for the European money markets; but lost against other currencies, like the Yen. European stock markets had slipped by the end of trading, showing a loss in investor confidence.

The Asian stock and money markets, which crashed Monday, saw a small rebound Tuesday. The Yen gained value against both the Euro and the U.S. dollar, sending Asian markets into a flurry of activity. Asian stock prices did rise, for the first time in 4 days of trading, but market confidence remained shaky.

Other markets showed unexpected activity. Australia surprised the global markets by cutting interest rates for the first time in 16 years in an attempt to bolster consumer confidence with the hope that other nations will follow suit. Meanwhile, banks around the globe continued to show signs of serious decay.

By far the biggest banking news of the day came from Iceland, with the announcement that the government would be stepping in to nationalize Icelands 2nd largest bank, Landsbanki, with financial backing from Russia. The move came shortly after panic spread throughout the EU after the Icelandic online bank Icesave froze customer accounts.

Wounded Iceland takes over No. 2 bank, seeks Russia loan

Iceland on Tuesday took over its second largest bank, propped up a battered currency and sought a 4 billion euro ($5.44 billion) loan from Russia to help tackle a crisis threatening to overwhelm the island nation.

Russian Finance Minister Alexei Kudrin said Moscow viewed positively the request from Iceland, whose premier said it faced a risk of "national bankruptcy".

"The result will be announced after negotiations," Kudrin said.

Prime Minister Geir Haarde told reporters that Iceland had sought help from other countries, but only its Nordic neighbors had given support. "In a situation like that, one has to look for new friends," said Haarde, declining to identify any countries that had rebuffed Iceland's appeals.

"With this, like everything else, nothing is certain until it's certain," Haarde told a news conference.

Savers' frustration over Icesave freeze

The Icelandic internet bank Icesave is expected to go into insolvency.

UK customers have around £4bn invested in the company. They have been warned they will probably have to claim their savings back through compensation schemes.