World stocks surge on bank rescue plan
LONDON ” Stock markets around the globe soared Monday on hopes that government rescue efforts will shore up the world’s battered financial system.
The rally began in Asia, spread to Europe and then caught fire when Wall Street rocketed higher, pulling up Latin American shares in its wake.
After eight days of bloodletting that drained nearly 2,400 points off the Dow, the U.S. blue chip index rose 936.42, or 11.08 percent, to 9,387.61 on Monday, its biggest one-day point gain in history.
“That is the response to the dramatic involvement of all the countries in this crisis,” Gil Deschatre, a financial consultant for Banco Fator in Rio de Janeiro, Brazil, where the country’s leading index finished the day up nearly 15 percent.
Markets reacted to a raft of measures announced in Europe that offered up some $2.3 trillion to protected the continent’s banks, and to expectations the U.S. government will join Britain and other countries in buying ownership stakes in troubled banks. The measures raised hopes that lending markets will restart and keep the wider economy moving.
In Europe on Monday, Germany’s DAX ended up 518.14 points, or 11.4 percent, at 5,062.45, while France’s CAC-40 finished 355.01 points, or 11.2 percent, higher at 3,531.50.
Britain’s FTSE 100 gained 324.84 points, or 8.3 percent, to 4,256.90, despite some hefty falls in the banks that have accepted government help. The strong showing follows sharp falls in stock indexes worldwide last week, and as interbank interest rates remain abnormally high.
Despite Monday’s sharp share price gains, investors remain skeptical that the stock markets are out of the woods. It’s too early to tell if the banking measures outlined Monday will actually work or how the recent carnage in financial markets will play out in the global economy.
“I’m not convinced yet. It’s a bit of a waiting game,” said David Jones, chief markets strategist at IG Index.
The latest coordinated move emerged before European trading began, when top central banks ” including the U.S. Federal Reserve and the European Central Bank ” unveiled new measures to thaw frozen credit markets and bolster funding to banks. They joined the Bank of England and the Swiss National Bank in saying they would provide unlimited U.S. dollar funds to financial institutions. The Bank of Japan said it was considering similar measures.
The banks’ action came after leaders of the 15 countries using the euro said Sunday they would guarantee new bank debt until the end of 2009, allow governments to help banks by buying preferred shares, and vowed to rescue important failing banks through emergency recapitalization.
The German government has since put together a rescue package worth as much as 500 billion euros ($671 billion) to shore up the country’s financial system, while France’s will provide up to 360 billion euros ($491 billion) to help banks stay afloat through the financial crisis.
In Britain, which doesn’t use the euro, the government confirmed Monday that it is injecting a total of 37 billion pounds ($63 billion) into three leading banks ” Royal Bank of Scotland PLC, Lloyds TSB PLC and HBOS PLC ” in return for equity stakes. Taxpayers will own about 60 percent of RBS and 40 percent of the merged Lloyds TSB and HBOS. The merger has been renegotiated Monday too, so the amount of Lloyds TSB shares that HBOS shareholders will receive is lower.
The key is whether the flurry of activity can actually ease conditions in the credit markets. Despite the coordinated interest rate reductions announced last Wednesday, and massive liquidity boosts, the rates at which banks lend to each other continued to rise. That means banks were afraid to lend to each other, and raises the chance that they and other businesses won’t get the credit they need to operate.
The London interbank offered rate, or Libor, for three-month dollar loans fell 0.07 percent to 4.75 percent, while the similar rate in euros, or Euribor, dipped only 0.063 to 5.318 percent. The rate remains well above the euro zone’s benchmark rate of 3.75 percent set by the ECB, meaning the credit freeze is far over. Usually Euribor is much closer to the ECB rate.
“There’s been nothing dramatic but there are some modest improvements in rates and spreads,” said Neil Mackinnon, chief economist at ECU Group.
In the U.S., the Bush administration said Monday it is moving quickly to implement its own $700 billion rescue program, including consulting with private law firms on how to buy ownership shares in banks to jump-start lending and get the economy moving again.
Latin America shares have been hammered by the recent global sell-off, but rebounded sharply on Monday. Brazil’s Ibovespa stock index rose 14.7 percent to close at 40,829, regaining ground after losing 20 percent of its value last week.
Mexico’s IPC index meanwhile gained 11 percent to close at 22,096, while Chile’s benchmark IPSA index jumped 12.5 percent to 2,364 and Peru’s IGBVL index rose 13.7 percent to 8,668. Exchanges in Argentina and Colombia were closed for a national holiday.
Earlier Asian markets set the tone for the day with Hong Kong’s Hang Seng Index, which tumbled more than 7 percent Friday, soared 1,515.29 points, or 10.24 percent, to finish at 16,312.16. Australian and Singapore indices jumped more than 5 percent, while South Korean and Chinese benchmarks added around 3.7 percent.
Elsewhere in Asia, Indonesia’s key index, down sharply in early trade, gained 0.9 percent after the lifting of a trading suspension, imposed last Wednesday amid a freefall in share prices. The upswing followed government measures to free up liquidity, including easing regulations for share buybacks and corporate financial reserve limits.
In Japan, where the Nikkei 225 tanked nearly 10 percent Friday to close out its worst week in history, trading was closed for a public holiday.
Oil prices rose, with light, sweet crude for November delivery up $2.88 at $80.587. The contract fell Friday $8.89 to $77.70, the lowest price since Sept. 10, 2007.
The 15-nation euro rose to $1.3517 late Monday afternoon in New York from $1.3308 late Friday. The British pound rose to $1.7280 from $1.6903, while the dollar rose to 101.27 Japanese yen from 100.15 yen.
AP Business Writer Jeremiah Marquez in Hong Kong and Bradley Brooks in Sao Paulo, Brazil contributed to this article.
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