US economists say there’s an increasing chance that the Federal Reserve could make an emergency interest rate cut in the next few days in the wake of the $US700 billion bailout legislation going through to try and boost confidence across the US economy.
Some reckon it could move as soon as tomorrow night, our time, to cut its Fed funds rate, its key overnight lending rate.
The cut could be 0.25%, according to US futures markets, but it could be more if the Fed wants to send an emphatic point about the need to settle nerves and help the fumbling economy.
The Fed’s next scheduled meeting of its key Open Markets Committee isn’t until the two-day session that ends on October 29.
Some economists think that a so-called ‘intra-meeting’ cut might happen to boost investor and consumer confidence.
But the speculation has had no impact on financial markets which have been shaken to their core by the banking and finance implosions of the past fortnight.
US stocks fell sharply, with the stock market suffering it’s its steepest weekly slump since May, as Congress failed to approve a $US700 billion bank bailout the president said is needed to avert a recession.
Bank lending froze around the world with short term rates in Europe soaring again to new highs and US Government debt yield maintaining near historic lows at the short end as investors, banks and others with cash kept it in the safest haven possible including central banks like the Reserve Bank where well over $7.4 billion was kept in cash over the weekend, according top early estimates on Friday (we won’t know the final amount until later this morning).
But a deal over the weekend will provide temporary relief and markets will improve. Our market was up by around 0.9% in the overnight futures on Saturday morning.
Such relief will be needed because confidence is being frayed.
In Europe, central banks did swaps with the Fed, injected tens of billions of dollars into money markets and took other measures to boost liquidity in an unprecedented display of support.
The Fed arranged with the European and Swiss central banks to inject $US13 billion ($A15.6 billion) into European markets.
That took the total of such "swap" deals with central banks to $US290 billion ($A348 billion) as the latest vortex of the 14-month-old sub-prime crisis ripped through US banking and extended to banks around the world.
The ECB was provided with an additional $US10 billion ($A12 billion) and the Swiss National Bank with $US3 billion ($A3.6 billion).
The ECB and the Bank of England then loaned $US35 billion ($A42 billion) and $US30 billion ($A36 billion) respectively to commercial banks for a week, and the South Korean central bank said it would inject at least $US10 billion ($A12 billion) as well.
The Danish central bank announced help for its money markets and Belgium and Holland central banks kept in discussion while the fate of the huge Fortis insurance and banking conglomerate was discussed after a succession of price falls late last week, without the help of stockmarket shorters.
Central banks in Europe used the reciprocal currency arrangements – known as swaps – with the Fed to keep eurozone money markets primed as banks closed out their third-quarter books, a situation that the RBA has also been trying to meet.
The RBA sold $US10 billion to local banks and institutions on Friday to inject more greenbacks, and today it hold its first auction of term deposits with the markets in an attempt to get the surplus cash out of the overnight market and onto its balance sheet.
That will then enable the RBA to re-inject this money into the markets to boost liquidity, if it wants to.
Both the Dow and the S&P 500 ended higher on Friday on hopes that the bailout plan will be approved. But Nasdaq finished slightly lower.
Europe fell on worries about the US, but Asia traded just about steady because at that stage it looked as though the failure of Washington Mutual might force the US politicians, especially the Republicans, to appreciate the seriousness of the problem. But that was not to happen.
The ASX 200 index ended down 22.6 points at 4904.8, while the broader All Ordinaries index shed 26.2 points, or 0.5%, to 4934.6.
Earlier in the day ASX200 index had been over 1% higher, but also nearly 2% lower as sentiment swung about the rescue of Washington Mutual and the bailout plan. The index managed to hold on to a 2% gain over the week, which was in contrast to the slumps in Europe and the US.
For the week, all three US stock indexes fell: the Dow dropped 2.15%, while the S & Poor 500 Index shed 3.33%, and Nasdaq dropped 4%.
After Friday’s close, the Wall Street Journal reported that super regional bank; Wachovia Corp had entered into preliminary talks with a handful of potential suitors, including Citigroup.
Whether that happens is up in the air with other market sources claiming possible buyers for Wachovia will wait till it fails and is seized by US regulators before bidding, much in the way JPMorgan moved to buy Washington Mutual.
China rose for the first time in weeks.
The CSI 300 rose 0.9% on Friday and 8.2% last week, the first weekly rise in nine weeks, in complete contrast to what was happening elsewhere.
Helping was the move by China Investment Corp, the country’s $US200 billion sovereign wealth fund, which bought shares in Industrial & Commercial Bank of China, Bank of China and China Construction Bank Corp., the nation’s three largest state-owned banks, in the past week, after a 58% fall in the CSI 300 this year.
China’s cabinet last week also agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia’s second-largest market a
