Global Stocks Seesaw on Bailout Setback

Central banks, however, have stepped in to calm jitters, and hopes are high for an eventual financial deal in Washington

by Mark Scott

Uncertainty hit global financial markets on Sept. 30 as traders from Hong Kong to London reacted to the failed $700 billion bailout in the U.S. Following a 7% drop in America's Dow Jones industrial average on Sept. 29, Asian bourses fell by as much as 6%, only to recover slightly by the close after reports surfaced that the U.S. Congress would push ahead with a financial recovery package. This market seesawing continued in Europe—the region's major exchanges opened lower but rebounded as traders speculated on the U.S. bailout plan.

With uncertainty still swirling around negotiations for a financial deal on Capitol Hill, Asian markets were the first to face the brunt of investor fears. Japan's Nikkei 225 index closed down 4%, while Hong Kong's Hang Seng fell by as much as 6%, only to finish slightly up by the close of trading. In Europe, market watchers said focus remained squarely on financial services as Britain's FTSE 100 opened 3% down, then rose 1.6% by late afternoon. Germany's DAX Index and France's CAC 40 followed suit, although Russia's MICEX Index was suspended for two hours after major selling in early trading spooked the country's authorities.

To address continuing market uncertainty, central bankers around the world have stepped in to calm fears. On Sept. 30, the Bank of Japan injected $19.2 billion into Tokyo's money market and the Reserve Bank of Australia added a further $2.3 billion to help local institutions. The latter bank now has added more than $1.6 billion a day to the country's money markets over the past two weeks. The Hong Kong Monetary Authority also reassured investors it would provide liquidity to lenders.

Brisk Assurances

That followed moves from the European Central Bank, which announced plans on Sept. 29 to provide additional capital for banks until the end of the year to ease problems in the money markets. The Bank of England similarly said it would offer $72.4 billion in extra three-month funds to financial institutions, and the Irish government added on Sept. 30 it would guarantee the deposits and borrowings of the country's six largest lenders, at an estimated cost of $575 billion.

Market watchers remained sanguine over the day's events, despite the sell-off in Asian markets and jittery trading across Europe. "Most of the panic selling took place yesterday; the markets were working out who were the weak hands," says Chris Watling, chief executive officer of consultants Longview Economics in London. "Banks and other financials have been punished, but the strong institutions will benefit from all this."

After yesterday's European government intervention (BusinessWeek.com, 9/29/08) in a number of floundering financial institutions, the trend continued on Sept. 30 when French, Belgian, and Luxembourg authorities injected $9.2 billion to rescue Franco-Belgian bank Dexia (DEXI.BR), whose share price has dropped over 50% since January 2009.

The bank got in trouble after bailing out its New York bond insurance unit and sustaining $300 million in U.S. subprime losses. Under the agreement, France's state-controlled Caisse des Dépôts & Consignations, which already holds a 12% stake in Dexia, will invest $2.85 billion and—alongside the French government—now will own 25% of the Franco-Belgian bank. Dexia's stock finished the day up 6.1%.

Urgent Powwow

After the announcement, French President Nicolas Sarkozy summoned the heads of France's leading banks and insurers to an emergency meeting. Afterward, Sarkozy's office said the government would announce unspecified "new measures" by the end of the week. Several executives spoke to reporters after the meeting, including the AXA (AXA) insurance group's CEO Henri de Castries, who said: "The French financial system is stable."

Other European and Asian financial institutions also face scrutiny as traders scour the markets for overstretched assets. In particular, analysts reckon Britain's Royal Bank of Scotland (RBS) and Switzerland's UBS (UBS) are at the top of many watch lists because of continued writedown fears. In Asia, Japan's Mitsubishi UFJ Financial (MTU), which bought a 20% stake in Morgan Stanley (MS) on Sept. 29, could be hit by its extended exposure to the U.S.

It's no wonder that global markets were shaky on Sept. 30 given the failure of Congress to broker a financial bailout. Yet many traders remained optimistic that U.S. politicians would find a solution. Said Credit Suisse (CS) analyst Andrew Garthwaite: "The Fed, Administration, and Congress have looked over the abyss and realized what's at stake."

With Carol Matlack in Paris.
Scott is a reporter in BusinessWeek's London bureau.