LONDON: Investors will be seeing this week whether policymakers found
a way to pull markets away from a deeper collapse as global capital
markets faced complete freeze-up.
The global financial system was on the brink of meltdown, the
International Monetary Fund warned on Saturday, a day after finance
chiefs from the Group of Seven rich nations failed to agree on
concrete, joint measures to end the crisis.
In a brief statement after their Washington talks, the G7 stopped
short of backing a British plan to guarantee lending between banks,
something many on Wall Street saw as vital to end growing market
panic.
European leaders then raced on Sunday to produce their own deal at a
summit in Paris, the focus fixed firmly on how much state money
governments could mobilise to buy into banks if needed, and if they
would also underwrite lending between banks, paralysed for now by fear
and distrust.
Analysts say policymakers must avert a wholesale breakdown in cross-
border capital and investment flows after the tumult of last week saw
investors dumping everything from stocks, bonds, oil and commodities
in a panic dash for cash.
Capital markets were already grinding to a halt in many parts of the
world with equity trading only briefly or completely suspended in
Russia, Iceland, Romania, Italy, Austria, Ukraine, Peru and Indonesia
last week.
"The crisis is moving with an astonishing speed and international
flows of funds are freezing rapidly," said Lena Komileva, head of G7
market economics at Tullett Prebon.
She said the lack of specific steps from the weekend G7 meeting was
likely to disappoint investors, threatening to cause more damage
across risk asset classes this week.
"The economic crisis has political and social costs. The backlash of
falling equities and disrupted credit channels could possibly result
in protectionism taking hold, which would cause severe damage to the
global economy," Komileva said.
This week, investors will receive key third-quarter corporate earnings
results from major banks and companies which will reveal the scale of
damage suffered by the real economy from market turbulence which
erupted in August 2007.
JP Morgan, Wells Fargo, Bank of New York Mellon, Citigroup and Merrill
Lynch are among banks which will unveil earnings for the three months
ending September, the month when Lehman Brothers collapsed and several
US and European financial firms were bailed out.
Results from Intel, Google, Nokia and Philips Electronics are also
due.
PANIC AND FEAR
World stocks, measured by the MSCI index, lost a fifth of their value
last week, tumbling to a five-year low as investors grew concerned
that major economies will sink into recession, wiping out corporate
profits and damaging consumption.
Barclays Capital estimates the trailing price-to-earnings ratio of
world stocks fell to just under 9 per cent from 18 only a year ago and
investors are discounting a 45 per cent decline in profits.
In Britain, where stocks have fallen 39 per cent this year, Barclays
says the dividend yield is just over 6 per cent, a level that has only
been seen three times in the past 108 years.
Compared to long-dated gilt yields, dividend yields have not been this
high since the Battle of Britain in 1940.
"It is true that in the de-leveraging and forced liquidations
currently dominating price action, there is unlikely to be very much
in the way of rational discounting going on," said Tim Bond, head of
asset allocation at Barclays.
"However, in the irrationality of individuals there is the rationality
of collective behaviour. The valuation yardsticks offer us a guide to
the extent to which the collective actions of market participants have
discounted various economic outcomes."
EMERGING PINCH Emerging markets are also feeling the pinch as foreign
capital drains away from risky assets, sending their shares down 20
per cent last week, on top of a 10 per cent decline suffered the week
before.
Since January, emerging country stocks have lost more than 50 per
cent.
Investors are demanding emerging sovereign debt to give yields of more
than 600 basis points above US Treasuries -- the highest since
mid-2004 -- in compensation for holding riskier bonds.
In Iceland, where the government took control of three of the
country's biggest banks last week, financial markets are grinding to a
halt as traders report hardly any trades in the crown currency and
money markets.
The cost of insuring the sovereign debt of Ukraine, Kazakhstan and
other Eastern European countries has soared, pricing in a mounting
risk of default. Many emerging market currencies are hitting multi-
year lows.
A falling currency makes it harder for emerging nations to repay
dollar-based foreign debt and exacerbates inflation.
"Large foreign institutional investors are likely to still have very
large exposures to some high-yielding emerging market currencies,"
said Stephen Jen, global head of currency research at Morgan Stanley.
"We believe these positions are in jeopardy. Unwinding of these
positions could lead to another wave of selling of many emerging
market currencies, unrelated to their economic fundamentals.
BigGains !!
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