World’s investors scramble for safety

World’s investors scramble for safety
By Richard Beales in New York and Krishna Guha in Washington
Copyright The Financial Times Limited 2007
Published: August 16 2007 20:45 | Last updated: August 16 2007 22:51


Financial market turmoil spread around the world on Thursday as investors fled Asian and European stocks and risky currency trades and sought the safety of short-term US government debt.

The day began with Asian markets plunging after Wednesday’s late sell-off in the US. Europe followed Asia lower, with the FTSE 100 shedding 4.1 per cent. US stocks, however, rebounded from early losses to close mixed. The S&P 500 index ended 0.3 per cent higher, powered by a late rally in financial stocks.

Michael Mayo, Deutsche Bank analyst, said that US bank and brokerage stocks rose on speculation that the Federal Reserve would cut interest rates in response to credit market turmoil.

Some analysts believe the Federal Reserve could be forced to cut interest rates in spite of its anti-inflation stance. Futures markets are pricing in a quarter-point cut in the Fed funds overnight rate, currently at 5.25 per cent, even before the US central bank’s scheduled meeting on September 18.

William Poole, president of the St Louis Fed, had said on Thursday that only a “calamity” would justify a Federal Reserve interest rate cut before the meeting. He played down the effect of market turmoil on economic growth, telling Bloomberg “no one has called up and said the sky is falling”.

But in a rare move, a spokesperson for the Fed said Mr Poole’s views did not necessarily represent those of the Fed’s interest rate setting committee as a whole.

The fear in the markets sent investors piling into short-term US government debt, sending yields tumbling, particularly early in the New York day. Yields on one-month Treasury bills dipped as low as 2.4 per cent before trading at about 3.1 per cent later, 0.9 percentage points lower on the day.

In another sign of risk aversion, the yen soared as investors unwound carry trades whereby they borrowed in yen and invested in higher yielding currencies. The Japanese currency gained more than 5 per cent against the New Zealand dollar and about 2 per cent against the US dollar.

The Chicago Board Options Exchange’s Vix index, often called a fear gauge, jumped above 37, its highest level in nearly five years, before easing back to about 31 as US stocks recouped losses.

Emerging markets, though, were increasingly caught up in the maelstrom. The MSCI emerging markets index is now almost 20 per cent off its peak set less than a month ago.

“The market turbulence affecting global credit markets has finally spilled over into the emerging markets,” said analysts at Goldman Sachs.

In Canada, banks announced a plan to stabilise that country’s market for asset-backed commercial paper, the short-term debt on which many financial institutions and companies rely.

But more symptoms of the credit crunch emerged, with shares in Countrywide Financial, the US mortgage lender, tumbling again after it drew credit lines to boost its cash position.

Additional reporting by Javier Blas and Robert Orr