World stock markets were mixed today as banking stocks on both sides of the Atlantic took another pounding.
Bank shared plunged despite the US Federal Reserve’s announcement that it is to buy massive amounts of short-term debt in an attempt to unblock tight credit markets.
Relief at the Fed move to invoke a Depression-era power to buy commercial paper, a short-term financing mechanism that many companies rely on for day-to-day operations such as purchasing supplies or making pay-rolls, proved short-lived as banking stocks plummeted.
“People are waiting to see how much follow-through there is from the Fed action but there’s profound uncertainty out there,” said Jeremy Batstone-Carr, head of research at Charles Stanley in London.
Hopes that the latest Fed move would help unclog credit markets pushed the Dow Jones index back up above the 10,000 mark but Bank of America’s announcement that it is looking to raise $10bn and slash its dividend by 50% extinguished those early gains and the Dow was down 74.71 points, or 0.8 %, at 9,880.79.
Bank of America tumbled 15%, taking other US banking groups, such as JP Morgan Chase down with it.
In Britain, the FTSE 100 index ended 0.4% higher at 4,726.20. The CAC-40 index in Paris was 0.6% higher at 3,732.22, but Germany’s DAX was down 1.1%, at 5,326.63.
Britain was the focal point of those banking jitters with Royal Bank of Scotland Group shedding around 40% of its value amid ongoing liquidity and solvency concerns and reports that the government might seek a stake in British banks to boost their balance sheets.
Gordon Brown and Chancellor Alistair Darling today met Bank of England governor Mervyn King and Financial Services Authority chairman Adair Turner to consider possible new action to stabilise the country’s financial system after the latest banking sell-off.
RBS was not the only British banking stock in trouble amid news reports that the chief executives of Britain’s largest banks met Mr Darling and Mr King last night to discuss the possibility of the British government providing funding, thought to be around £50bn, in exchange for stakes in the banks.
Lloyds TSB, which is in the process of taking over HBOS, was down nearly 13%, while Barclays, which has denied it is asking for government funding, was 9% lower. HBOS itself was down 41%.
All three European indexes had been solidly higher earlier in the session before the latest bout of banking jitters on hopes that the world’s leading central banks will cut interest rates soon, possibly in a coordinated manner to deal with the world financial crisis.
Those hopes were fuelled by the Reserve Bank of Australia’s overnight move to cut borrowing costs by a massive 1% to 6%, its biggest since 1992.
The move sent Sydney’s S&P/ASX-200 index, which had opened 3.7% lower, up 1.7% to 4,618.7 and helped the Australian dollar push back up above 72.56 US cents.
Other markets, including the main indexes in South Korea, Singapore and Taiwan, rebounded after the bold move and market observers said the same could happen if other central banks follow suit.
The Bank of England is now seen as almost certain to cut interest rates on Thursday, with the questions now being asked are whether it will reduce borrowing costs by half a point to 4.50% for the first time in seven years.
There has been speculation the Bank of England might join the US Federal Reserve and the European Central Bank in a simultaneous cut.
“The one percentage point rate cut in Australia overnight has increased speculation that major central banks are planning to ’shock’ markets with large-scale and/or coordinated interest rate action,” said Simon Ward, chief economist at New Star Asset Management.
Confidence has also drained away in Iceland, which, according to the Prime Minister Geir Haarde is facing the prospect of bankruptcy after its banks went on the acquisition trail across the continent, accumulating massive debts in the process.
The government’s latest response was to nationalise its second-largest bank Landsbanki under day-old legislation and fixed its currency exchange rate.
Japan’s benchmark Nikkei 225 index erased some of its early losses to close down 3% at 10,155.90 – still its lowest level in almost five years.
Efforts by the Russian government to prop up the country’s troubled banking sector with fresh cash injections did little to lift the shattered stock markets a day after suffering their worst-ever day of trading.
The RTS opened late at 1pm local time (9am Irish Time) and closed down 1% at 858.2 points – after briefly breaching 900 points in early afternoon. The MICEX dropped at one point in trading by 7.9% late afternoon but recovered most of its losses to close down also by 1% to 744.8 points.
The euro traded up at 1.3691 dollars from 1.3516 dollars yesterday.