Stockmarkets swung violently overnight as traders digested the news of a linked, $US100 billion move by major central banks to try and stave off the tightening credit crunch.
The news from the Fed, Bank of England, Swiss National Bank, European Central Bank and Bank of Canada came half an hour before US share trading was due to start in the US at 1.30 am this morning, Australian time.
The news saw the US market open up more than 250 points, reversing the sharp, 294 point fall the day before after the Fed only cut rates by a quarter of a per cent. The market had dropped over 330 points Tuesday as it gave up an early gain because investors were unhappy with the cut and wanted more.
Overnight word was leaked of the planned joint approach from the central banks and it appeared in the major financial media in Europe and the US before the market opened, hence the very sharp rise. But as the day wore on, investors had second thoughts, and at one stage the Dow fell back into the red to be down more than 50 points.
It closed with a small gain of 41 points on the Dow.
Driving the rethinking was news from three major US banks that they will be making bigger than expected write-downs and reporting losses on subprime mortgages and related debt in the fourth quarter. Bank of America, First Wachovia and PNC all said their fourth quarter results would lower after the bigger write-downs.
Bank of America's new forecast contradicted a previous statement a few weeks ago that it got its write-downs right.
The three joined UBS and Washington Mutual which this week announced write downs and losses of $US10.5 billion and $US1.6 billion respectively and revealed they had raised or were looking for $US15 billion and $US2.5 billion in new capital and capital saving deals (such as converting dividends to shares or cutting payouts).
The reports told traders that whatever the central banks did, the problems remained, so sentiment switched.
New York oil prices rose more than $US4 a barrel on claims the intervention would help US economic growth. It won't but that was hedge funds and other non oil consumers returning to speculate and make money from the bunnies.
US interest rates rose sharply, eased, and then rose again, the Aussie dollar edged back towards 88 US cents on expectations the move would see the yen carry trade restarted. The yen fell sharply against the US dollar and the Aussie.
But gold only finished up a $US1.70 in New York to almost $US819 an ounce, copper fell more than 5USc a pound to $US3.03 a pound but wheat jumped 30 USc a bushell to close at $US9.40 a bushell for the most active contract and close to its all time high once again.
The move by the central banks is the biggest act of international economic cooperation since the September 11 terrorist attacks.
While the banks pumped more money in over time in August and early September that was overnight dealings which were often reversed the next day.
The fed and the ECB have already revealed attempts in the past month to add more money to the their banking systems on a more systematic basis, and also revealed attempts to inject liquidity across the end of the year into January to try and alleviate what is emerging as the biggest fear of all: a complete credit lock up at year's end.
The Fed said in a statement it will make up to $US24 billion available to the ECB and Swiss National Bank to increase the supply of dollars in Europe. The Fed also plans four auctions, including two this month that will add as much as $US40 billion, to increase cash in the U.S. It made two injections totalling US88 billion last month, to no avail as short term interest rate spreads continued to widen.
Central bankers took the action after interest-rate reductions in the US, Britain and Canada over the past week failed to allay concerns that banks will continue to reduce their lending in coming months, sending the US into recession and possibly Europe. Britain seems to be headed that way anyway.
Bloomberg said a Fed official told reporters that the US central bank's efforts won't add net liquidity to the banking system. The plans are aimed at buttressing so-called term funding markets, such as for one-month loans, rather than overnight cash. The Fed will balance its various operations, including daily repurchases of Treasury notes and direct loans to banks.
The Bank of England increased the size of reserves it will auction in money market operations and widened the range of collateral it will accept on three-month loans.
The same Fed official said the announcement wasn't a reaction to the slump in stocks yesterday. The agreement was reached with central banks abroad last week and was announced today at a time when markets were open in Europe and the U.S.
The Fed said in its statement that the measures were "designed to address elevated pressures in short-term funding markets."
The Fed also said it's considering setting up a permanent arrangement to provide funds to banks through so- called term auction facility operations.
The first US auction, of 28-day funds, will be $US20 billion next Monday, December 17, the second three days later
The central bank plans two more auctions next month on January 14 and 28, with others possibly to follow.
The Fed official said the central bank won't reveal the names of those bidding for the funds and the auctions aren't aimed at helping particular banks.
"By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity,'' the Fed statement said.
These moves are different from repurchase agreements which target the cash or Federal Funds rate to keep it at
