Wall Street hits lows of 1997
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Wall Street fell overnight to a low last reached in April 1997 amid the worsening performance of the US economy.
On a seasonally adjusted basis the US GDP for October to Decelier fell by 6.2% annualised. The contraction in the US economy was far worst than first thought and reflects the pain occuring in the world’s largest economy. The decline in the GDP was the worst performance since 1982.
The Dow Jones slumped 1.66% to 7062.93 to take the loss for the week to in excess of 4% as the economy sees no end in sight to the gloom. Dragging the market lower was the performance of Citigroup and General Electric. The market also had its worst February in over 70 years as the market tumbled 12%.
Bank of America to slash workforce by 35,000
To further underline the ongoing financial turmoil caused by the global financial crisis the Bank of America announced plans to slash it’s workforce by up to 35,000 over the next three years.
The cuts come amid the takeover of Merrill Lynch and the ongoing issues in the US banking system. The cuts are forecast around 10% of the total workforce.
Westpac tap market for $2.5 billion
Westpac have announced plans to raise $2.5 billion to increase it’s capital amid worsening global conditions.
The plans were unveiled along with an increase in debt provisioning and a one-off $500 million adjustment regarding it’s acquisition of St George.
Westpac’s placement has been fully underwritten by JPMorgan Australia, UBS, and Morgan Stanley Australia Securities and includes a $500 million retail component that will be made available to shareholders via a share purchase plan.
Wes
ECB & UK Central Banks cut rates again
European Central Banks slashed rates overnight as the European Central Bank (ECB) cut rates by 0.75% to 2.5% while the UK Central Bank lowered rates by 1% to 2%.
The cut by the ECB was the biggest in the near 10 year history of the ECB, the cuts have now amounted to 1.75% in the last two months.
The UK Central Bank’s rate of 2% is the lowest since they were foundered in 1694 and reflects the pain being experienced in the UK.
Both the ECB and UK Central Bank have indicated further cuts are likely in coming months.
Citigroup to axe 50,000 jobs
Citigroup announced plans to trim 50,000 from their global workforce and cut expenses by 20% to recover from the masive losses incurred.
Citigroup has 2500 staff in Australia mostly based in Sydney and Melbourne, their total workforce was 352,000 at the end of September 2008.
Last week Citigroup’s share price fell to a 13 year low as the stock tumbled amid worsening credit and banking conditions.
Australian interbank lending crisis eases
Australian interbank lending rates have fallen faster than those same rates overseas in recent weeks as interbank lending rate have moderated considerably in Australia.
The rate between the three month bank bill swap rate and the overnight index swap dropped to 32 basis points from 45 basis points last week. This is down from 140 basis points at the peak of the credit crisis in October and directly reflects the cost of interbank lending.
In the US the equilivant rate has fallen from 3.60% to 1.70% at the end of last week. A considerable drop from the peak but it also reflects the fear that is still evident in the US.
RBA look to another 1% cut in December
The RBA will almost certainly cut rates again by 100 basis points or more after economic data from Australia and around the world is pointing to a global recession.
Last night Europe announced that the 15 countries that make up the Eurozone has fallen into recession amid worsening economic conditions.
A day earlier the economic powerhouse of Germany announced they had fallen into recession amid the global crisis of confidence affecting markets.
The fear of ongoing job cuts around the world driven by corporate cutbacks is now widespread with acute pain being visable throughout Europe and the US. The fear and panic their has spread to other regions and Australia may be heading down the same path.
Australian markets have been savaged over the last six months and consumers have stopped spending hoarding available cash in case of job cuts or harder economic times ahead.
This fear will force the RBA into another major rates cut in December that could see 100 basis points cut from the official rate to 4.25%. More cuts will follow next year as the economy is expected to experience a very tough 2009 amid corporate job cuts and record low consumer confidence.
How big do you the December rate cut will be? Add your comment today.
Commonwealth Bank hit 3.5 year lows
The Commonwealth Bank today hit a three and a half year share price low over broker downgrades and concerns about debt provisioning after being caught up in a number of corporate collapses.
Several major brokers have downgraded the Commonwealth Bank in recents days as concern has grown that that they are not as safe as previously expected.
Previously the ANZ and National Australia Bank were considered high risk while Westpac and the Commonwealth Bank were considered lower risk. But in recent days the National Australia Bank has undertaken a $3 billion capital raising and funds have started to flow from the Commonwealth Bank into NAB.
The Commonwealth Bank is also burdened by having to raise in the vicinity of $14 billion to replace BankWest funding. The Commonwealth will be able to secure the funding but in the current climate this could be at a considerable premium.
In another negative the Commonwealth Bank is also trailing it’s rivals with a tier 1 capital ratio of 7.6% compared to the recently increased National Australia Bank at 8%.
Financial Deregulation is Dead
Financial deregulation is dead as the focus switches back to greater regulation within economies to stop the current global financial crisis occuring again.
The deregulation of the last thirty years around the world unleashed a period of unexpected economic expansion throughout the globe as financial markets were opened up, tariffs reduced or abolished, currencies unhedged to the gold price and so forth.
These changes coincided with a greater focus on reduction of risks especially within the banking industry as less capital was deployed within the banking system as banks leveraged to seek stronger return on equity through investments.
Now as the world sits on the brink of financial oblivion the spectre of greater financial regulation is well and truly back on the table.
The G20 summit to be held in November with the world’s leaders will focus on among other issues the focus of imposing financial regulation upon their respective economies. No longer is financial deregulation king but financial regulation.
Once the washup is done from this global financial crisis we can expect to see a greater focus on financial security first and foremost among global financial institutions and a tougher regulations imposed by governments to minimise the risk of this occuring again.
Chief among items likely to be discussed will be the nature of the hedge fund business and the focus on short selling by hedge funds and the likely impact this has on the confidence and performance of financial markets.
They will also discuss plans to create liquidity in markets after recent stimulus packages flagged throughout Europe and the US.
Either way expect more the talk to be about financial regulation for the next decade, not deregulation.
Global Financial Crisis bites hard in Europe, Asia & US
The global financial crisis continues to bite hard around the world as more bad news is reported each day throughout Europe, US and Asia.
To give an idea how bad things are Wachovia, the big US bank unveiled a US $23.9 billion third quarter loss after writing down US $18.7 billion in goodwill and US $6.6 billion in credit losses.
Wachovia also projected an additional US $26.1 billion in mortgage related losses in 2009. Wachovia is currently preparing to be taken over by Wells Fargo.
Meanwhile, in Europe Hungary increased it’s interest rtes by 3 per cent to 11.5% to maintain it’s peg to the Euro currency. This is likely to continue throughout Eastern Europe to stem capital outflows.
This has followed heavy selling across currencies such as Russia, Turkey, India, Argentina etc. The currency sell-off has affected virtually every currency in the world including heavyweights the Yen, Euro and Pound as all currencies have depreciated against the USD.
The Yen carry-trade which has financed so much of the global investment binge has the hedge funds has started to be unwound as funds have deserted the Yen for the safety of the USD.
The contagion that is inflicting the world has definately impacted Australia with the sharemarket today hitting four year lows as the All Ordinaries fell under 4000 again. The AUD has also fallen heavily from near parity to below 65c since July.
It should be noted that while Australia has felt some pain it is nothing compared to some other countries around the world and it is hard to realise if most people realise still how lucky and insulated we have been.
At this stage it is up in the air how well Australia will survive in 2009. I suspect the bad times have only just begun should China not be able to quickly re-establish momentum in their economy.