Accross the Spectrum - October Second update
US President George Bush has announced he will host an international summit in response to the current global financial difficulties sometime after the US presidential election in early November. The goal of the meeting is "to review progress being made to address the current crisis and to seek agreement on the principles of reform needed to avoid a repetition and assure global prosperity in the future." The meeting may prove to be the first in a series of meetings.
Sweden has become the latest European country to take action to stabilise its financial system with the creation of a USD 205 billion programme to boost liquidity in the system and take direct stakes in banks if needed. While its banks are stable and have experienced no liquidity or capital problems so far, they do control two thirds of lending in the Baltic states of Estonia, Latvia and Lithuania where economic concerns exist which could undermine Swedish banks.
The Dutch banking and insurance group ING has accepted a 10 billion euro capital injection from the Dutch government to boost its core capital. It is the first Dutch financial group to benefit from a 20 billion euro fund created a week ago by the Dutch government to recapitalise banks and insurers.
South Korea has joined countries in Europe, along with Hong Kong and Australia, in providing state backing to banks. The government will guarantee USD 100 billion in bank debts and supply lenders with USD 30 billion to stabilise its financial markets. South Korea is one of the few banking systems in Asia where domestic deposits are insufficient to fund loans. That's forced South Korea to rely on the wholesale market for about 44% of its funding, with international markets accounting for as much as 12%. The won has lost a third of its value this year, and dropped almost 10% last Thursday alone.
London interbank rates fell across the board with hopes rising among traders that measures by various national governments to guarantee loans and invest in banks are perhaps beginning to ease liquidity issues in money markets. Three-month Libor rates for dollar, euro and sterling on Friday fell to 4.41%, 5.02% and 6.16% respectively, all nearly half a percentage point down from a week ago.
State-backed rescue plans in the US, Europe and South Korea are encouraging purchases of higher yielding currencies funded in Japan, leading the yen to decline against other currencies. The yen declined to 137.93 per euro and 102.14 per dollar. Against the euro, the dollar weakened to USD1.3502 and the British pound rose to USD1.7470.
OPEC, the supplier of 40% of the world's crude oil, plans to cut output for the first time in two years at a meeting this Friday as the price of oil slides towards USD 50 a barrel. While OPEC may be able to prevent some of the price decline, analysts think it will be difficult for them to stem a price fall.
UK house prices posted the biggest annual decline in at least six years in October. The average asking price for a home fell 4.9% from a year earlier to 229,691 pounds (USD 398,000). In London prices dropped 2% from a year earlier. It is predicted by analysts that the UK economy will decrease 1% next year by analysts and they expect the Bank of England to lower the benchmark interest rate further in the coming months.
China's economic growth rate has fallen for the third quarter in succession at a rate of 9% in the three months to September, down from 10.1% over the previous quarter. A spokesman for the Chinese National Bureau of Statistics commented, "The growth rate of the world economy has slowed down noticeably. There are more uncertain and volatile factors in the international economic climate. All these factors have started to release their negative impact on China's economy."
India's central bank has unexpectedly lowered its key repurchase rate for the first time since 2004 from 9% to 8%. India's finance minister said, "I hope this reduction in interest rates will enthuse investors to continue to take forward their investment proposals." He further commented that the reduction "is consistent with our objective to moderate inflation as well as ensure satisfactory growth."
A survey by Nomura Asset Management UK has revealed that three quarters of northern European investors are planning to raise exposure to emerging markets equities over the next three years. Out of the 20 institutions surveyed, a quarter will raise their emerging market exposure between 4 & 10%, while the rest have more modest plans of increasing exposure by up to 4%. The survey also revealed that they are moving towards using more regional specialists rather than general emerging market fund managers in search of higher performance.
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