Worries About AIG Slam Global Markets
Share prices in Asia and Europe swooned Tuesday and central banks moved to add capital to markets as the fate of American International Group Inc. intensified investor worries that Wall Street's troubles would have global repercussions.
Markets in Shanghai, Hong Kong and Tokyo -- closed Monday because of holidays -- registered big drops Tuesday as investors digested major blows to Wall Street's confidence and Monday's 4.4% drop in the Dow Jones Industrial Average, its steepest fall in more than six years.
Elsewhere, markets remained turbulent Tuesday, with U.S. markets volatile. The Dow Jones Industrial Average was briefly down about 100 points midafternoon after the U.S. Federal Reserve said it would leave its interest-rate target unchanged for now. European markets ended mostly lower.
Blows to the financial sector in recent days included the bankruptcy filing Monday of Lehman Brothers Holdings Inc. and the deal by Bank of America Corp. to purchase Merrill Lynch & Co. Lehman's filing led regulators in South Korea to suspend the firm's local businesses, while some Japanese banks detailed financial hits and the investment bank suspended operations in Hong Kong. The filing also threw a stumbling block in front of Citic Group's plan to buy shares of Citic International Financial Holdings Ltd., an agreement on which Lehman advised.
But it was worry about New York-based AIG, which Tuesday morning in the U.S. was pursuing ways to come up with billions in extra collateral and payments for certain products following credit downgrades by Standard & Poor's and Moody's Investors Service, that underscored most strongly the financial sector's sensitive state. The insurance titan touches many parts of the financial world, insuring everything from big corporate ventures to the executives who run them, plus other financial services and interests in real estate and other businesses.
'The turmoil surrounding the financial sector looks like a complex web that will no doubt flow through to many other layers of the global economy,' said IG Markets sales trading head Harley Salt. Added a broker in Melbourne, 'The biggest fear is: who's next?'
AIG is an insurance giant across Asia, where its $14 billion of premiums last year were double the total from its business in the U.S. A number of its Asian units said Tuesday they are independent and have enough capital to meet all policy claims.
On Tuesday, the European Central Bank pumped 70 billion euros ($100.2 billion) in one-day funds into euro-zone money markets, more than double its Monday injection of 30 billion euros. The Bank of Japan injected 2.5 trillion yen ($23.84 billion) into Japanese money markets in two separate transactions, pledging to ensure stability. In Taiwan, the central bank trimmed capital-reserve ratios on deposits held by commercial banks, a move which the central bank assured would pump about 200 billion Taiwanese dollars ($6.23 billion) into the banking system.
The Bank of England offered GBP 20 billion ($36.05 billion) in extra two-day funds, atop Monday's GBP 5 billion in extra three-day funds. Central banks in Australia and India have also taken steps to infuse fresh capital into their markets.
The moves followed other efforts to jump-start the world's economies, including China's lowering of interest rates Monday for the first time in more than six years.
Still, investors fled equities. In Tokyo, the Nikkei 225 Stock Average fell 5%, while indexes in South Korea and Hong Kong dropped 6.1% and 5.4%. Taiwan's index ended the day down 4.9%. The Shanghai Composite, which tracks domestically listed Chinese companies, sank 4.5%.
European markets weakened further during the day. London's FTSE 250 closed down 3.4%, while Paris ended 2% lower and Frankfurt down 1.6%. In Russia, shares ended down 12%. In the U.S., the Dow industrials were flat ahead of the Fed's rate decision.
Investors fled to havens like bonds. Credit-default spreads widened to record levels, as investors showed willingness to pay up for contracts that are essentially insurance policies in case Asian corporations default on their debt.
Doffing of risk by investors also hurt some Asian currencies, which sagged as the U.S. dollar attracted flight-to-safety flows. The South Korean currency, the won, hit a four-year low against the U.S. dollar, dropping nearly 4.5% from Monday's close to 1,165.8 won per dollar. Year-to-date, the won has weakened 19.4% against the dollar. The Indian rupee, which has lost about 15.5% against the dollar, dropped 1.4% on Tuesday to 46.63 rupees per dollar. The Australian currency also came under pressure, falling to $0.7881, its lowest level since August 2007.
The financial sector's woes complicate efforts by Asian policy makers to rein in inflation. China's rate cut Monday signaled a shift by authorities from worrying about how to contain inflation to supporting growth, some market watchers said. 'China is not going to stop here,' said Irene Cheung, head of ABN Amro's local markets research group in Singapore.
Ms. Cheung wondered, however, whether Asian central banks -- apart from China's -- really have room to maneuver on interest-rate policies as they balance twin necessities of fostering growth and containing inflation, which is reaching record levels in countries such as Malaysia.
Analysts, portfolio managers and sell-side traders said investors in Asia were waiting to see how events unfolded in the U.S. after the Fed's interest-rate decision. Murkiness around how AIG intends to save itself also caused investors to flee. 'No one wants to put money to work until there's clarity about that,' said one trader at a Western investment bank about AIG.
Some continue to see Asia as one-step removed from the financial storm. They point out strong corporate balance sheets and fat coffers of central banks. They also noted that some indexes and individual stocks closed above their lows Tuesday, an indication that investors aren't in panic-mode regarding Asia's prospects within a weakening global economy. Australia's S&P/ASX 200 benchmark finished down 1.4%, after losing 2.7% earlier in the trading day.
While retail investors are primarily pulling money out of stocks, some institutions said they are 'waiting on the sidelines' or even trying to pick up a few bargains. 'We haven't jumped in up to the eyeballs, but we have been buying steadily,' said Hugh Young, Singapore-based chief of Aberdeen Asset Management Asia. 'What makes us really comfortable is that balance sheets are strong.'
Laura Santini |
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