Rate cuts fail to halt fall in commodity prices - LONDON

Rate cuts fail to halt fall in commodity prices - LONDON

LONDON: A coordinated round of rate cuts by leading central banks failed to halt the downward march of prices yesterday for oil, copper and many other commodities, hit hard by the turmoil in financial markets.

Gold was an exception, getting a lift as investors scurried for the relative safety of the precious metal.

‘The only commodity that looks like it could be well supported in this environment, as a safe- haven investment, will be gold,’ said Mr Mark Pervan, ANZ’s senior commodity analyst. ‘Oil particularly is vulnerable because it is the commodity most exposed to the US economy.’

Crude oil rallied briefly after the coordinated rate cuts but was soon back in negative territory, slipping about US$1.60 a barrel to US$88.46 a barrel.

It had earlier fallen to as low as US$86.05 a barrel and is about 40 per cent off a peak of US$147.27 struck in July. Fears that the crisis could slash demand generated the widespread losses in commodity and energy markets.

Copper on the London Metal Exchange (LME) - often seen as a key gauge of real economic activity - trimmed losses following the rate cuts, after sliding more than 7 per cent earlier. LME copper fell 7.1 per cent to its lowest level since March 2006 at US$5,227 a tonne in early trade.

Gold rose sharply as investors sought safer assets but saw gains trimmed after the rate cuts.

It rose early to a peak of US$915.30 an ounce, its highest since Sept 29, but fell back to around US$900 after the rate cuts. Still, it is up sharply from its close of US$886.60 in New York on Tuesday.

In the agricultural sector, wheat and corn futures were swept lower on fears that the crisis could curtail demand.

Chicago Board of Trade wheat for December delivery fell nearly 2 per cent to US$5.93 a bushel, while December corn dipped 1.2 per cent to US$4.12 a bushel.

Robusta coffee futures in London tumbled 12 per cent in early trade to the lowest level since May last year before the benchmark January contract cut losses almost in half to stand US$105, or 5.6 per cent, lower at US$1,759 a tonne.

‘It’s fund selling, origin selling - more of what we have been seeing,’ one trader said, referring to long liquidation due to the global financial crisis.

Sugar and cocoa prices also fell sharply.

REUTERS

Source : Straits Times - 09 Oct 2008

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Hell in Asia

Hell in Asia

Panic attack as investors sell off shares at any price

By Kwan Weng Kin & Lee Su Shyan

ASIAN markets had a panic attack yesterday on fears that the financial crisis was fast resembling a runaway train that no amount of intervention could stop.
Investors across the region sold off shares at any price as they rushed for the exits, echoing the sort of alarm last seen during the Asian financial crisis and the 1987 Black Monday crash.

Japanese Prime Minister Taro Aso caught the mood: ‘(The market plunge) is not normal. Frankly, it is beyond our imagination. We have huge fears going ahead.’

The feel-good effect of the 100 basis point interest rate cut in Australia on Tuesday had well dissipated.

Nothing seemed to ease the sense of fear, not big interest rate cuts, not even Britain’s £50 billion (S$127 billion) bank rescue. Singapore’s Straits Times Index (STI) registered its largest drop in percentage terms - 6.61 per cent - since April 2000 and lost 143.94 points.

The STI lost about 50 points in the morning, but remisier Desmond Leong said it was anticipated: ‘It dropped in an orderly fashion, in line with expectations after the Dow fell (5 per cent on Tuesday) and the Hang Seng was coming off.’

But dealers had to hang onto their seats for the afternoon ride.

‘We heard during lunch that the Nikkei had crashed, so we all rushed back,’ said Mr Leong.

Between 3pm and 4pm, the STI fell almost 100 points, or close to 5 per cent.

Mr Leong said: ‘You could feel the fear when you looked at the screen. No one bothered to queue. People were just throwing shares like Noble Group, not waiting to see if there were any buyers. They were taking any price.’

Commodity player Noble lost 13 per cent, or 13 cents, to close at 88 cents.

The STI had a tiny lift towards the end, rising about eight points to close at 2,033.61.

It was even worse in Hong Kong. Its Monetary Authority slashed its main interest rate by 100 basis points - the biggest cut since the benchmark started a decade ago - yet the Hang Seng Index still dived 8.2 per cent.

Japan’s Nikkei had its worst percentage fall since Black Monday,with the index plummeting 9.4 per cent to close at 9,203.32, its lowest level since June 2003.

One of the biggest losers was Toyota Motors, down 11 per cent sparked by reports that operating profits were expected to fall by 40 per cent this year.

Meanwhile the yen rose steeply against the greenback, hitting 99.61 - its highest level since April 1 - putting more pressure on Japan’s slumping exports.

Indonesia’s index plunged 10 per cent - its largest decline since the Asian financial crisis - and forced the stock exchange to halt trading.

South Korea’s Kospi tumbled 5.8 per cent and is down 32 per cent for the year.

The Shanghai market managed to only pare its losses to 3 per cent on hopes - successful as it later turned out - that rates would be cut.

When European markets opened, London’s FTSE 100 brushed off the British government’s £50 billion cash offer to British banks and fell 6.8 per cent, while France’s CAC was off 8 per cent.

They regained some ground after the coordinated rate cuts by central banks in the United States, Britain, the European Union and others.

Mr Kevin Scully, managing director of corporate finance firm NRA Capital, said the selling activity in Singapore has taken a different tone.

He said retail investors have finished their selling of the penny stocks, which may explain why trading volumes have dropped to under one billion shares a day.

But investors are getting more nervous and are trying to redeem their funds, which means units trusts and hedge funds need to sell their assets.

Since Oct 2, the STI has shed 13 per cent, largely due to more pronounced selling of blue chips. Yesterday, 1.4 billion shares were traded.

Blue chips are the easiest to offload, and so while they have held up in recent months, they are now being hit. SingTel, for example, which had kept its head above the $3 mark since December 2006, fell below that yesterday. It lost 22 cents to $2.90, with heavy volume at 38 million shares.

Meanwhile, Asean finance ministers said in Dubai that the region’s bank systems were resilient.

Source : Straits Times - 09 Oct 2008

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S’pore is ‘fifth most competitive economy

S’pore is ‘fifth most competitive economy’

It moves up 2 places in WEF survey; Hong Kong up one place to 11th

By Dennis Chan, Deputy Money Editor

Singapore (above) was also ranked among the top two countries for the efficiency of its markets.

SINGAPORE has climbed two notches to fifth place in the World Economic Forum’s (WEF) latest global competitiveness index, distancing itself from the other Asian economies.

The annual survey, released last night, showed that the next most competitive Asian economy - Japan - had dropped to ninth from eighth spot.

It was only last year that Singapore overtook Japan in the annual ranking, which polled a record 12,297 business leaders in 134 economies this year.

Perennial business rival Hong Kong improved one place to 11th.

In the survey, economies were assessed according to 12 ‘pillars’ of competitiveness, ranging from infrastructure and macroeconomic stability, to business sophistication and innovation. These are weighted for each economy to reflect their stage of development.

Singapore’s improved ranking was reflected by its strong institutional environment that came about as a result of a strengthening across all aspects of the institutional framework.

It has the best ranking of all economies in terms of public trust of politicians, wastefulness of government spending, burden of government regulation and transparency of government policymaking.

It was also ranked among the top two countries for the efficiency of all of its markets - goods, labour and financial - ensuring proper allocation of these factors to their best use, the survey said.

‘Singapore also has world-class infrastructure, leading the world in the quality of its port and transport facilities.’

It scored high in other indicators as well, such as higher education and training, and technological readiness.

On the flipside, its overall ranking is constrained by its small domestic market and mixed performance in the macroeconomic stability pillar, where it ranks 59th and 121st respectively for its interest rate spread and government debt.

Respondents also cited inflation as their biggest bugbear for doing business in Singapore.

Notwithstanding the current financial crisis, the US retained its position as the world’s most competitive economy.

The survey was conducted between January and May this year, which means that the index does not reflect the worsening global crisis.

But Ms Jennifer Blanke, senior economist of the forum, said the index aimed to take a longer-term view, and on that basis, the US ranking was fully justified, Reuters reported.

The US scored highly as it is endowed with many structural features that make its economy extremely productive. This places it on a strong footing to ride out business cycle shifts and economic shocks.

Despite rising concerns about the soundness of the banking sector and macroeconomic weaknesses, the country’s many other strengths continue to make it a very productive environment, the survey noted.

On the other hand, the business costs of terrorism, crime and violence are points of concern.

But the country’s greatest weakness is its macroeconomic stability, where it ranks a lowly 67th overall.

Its burgeoning levels of public indebtedness - at more than 60per cent of gross domestic product -suggest that the US is not preparing financially for its future liabilities. Interest payments will increasingly restrict its fiscal policy freedom going into the future, the survey warned.

In second, third and fourth places were the Northern European countries of Switzerland, Denmark and Sweden, rounding off an unchanged top four.

China continued to climb up the charts - up four places to 30 - helped by its large market and strong economic performance.

Ninth-ranked Japan has a major competitive edge in the areas of business sophistication and innovation.

Its overall performance, however, is dragged down by its macroeconomic weaknesses, with an extremely high budget deficit (ranked 110th), which have led to the build-up of one of the highest public debt levels in the world (ranked 129th).

As for Hong Kong, it is ranked first for its legal rights, capital flows and access to financing via the local equity market.

But its small domestic market size and mixed performance in the areas of health and primary education, as well as higher education and training, were a drag on its overall ranking.

Source : Straits Times - 09 Oct 2008

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IRs integrated resorts to be buttressed against attacks

IRs integrated resorts to be buttressed against attacks

Resorts will have state-of-the-art security to ward off terror threats

By Esther Tan

THE upcoming integrated resorts (IRs) at Marina Bay and Sentosa will have shatterproof glass and structural reinforcements to help them withstand terrorist attacks, a top-ranking police official revealed yesterday.
The resorts, slated to open between next year and 2010, will also have security fences and state-of-the-art surveillance systems to ward off any threats, said Assistant Commissioner of Police and director of operations Wong Hong Kuan yesterday.

Officials believe the multibillion-dollar complexes, which will include a theme park and swanky casinos, could be a target for extremists.

‘We expect integrated resorts to be perceived as a high threat because of their iconic nature,’ said Assistant Commissioner Wong. ‘VIPs will grace such premises, so a strike at such a target will have high symbolic value.’

The companies behind the resorts are looking to ‘harden’ the complexes to dissuade a potential attack.

Along with perimeter fences, the resorts are expected to be ringed by metal and concrete posts to prevent vehicles from barging into sensitive areas.

Each post can cost up to $5,000.

Tightly controlled access points, closed-circuit television cameras and guard posts will also dot the resorts, which are expected to attract millions of visitors annually.

The complexes will have a separate, covered drop-off point for heads of state and other dignitaries to prevent open-air attacks.

Both resorts declined to reveal how much the security measures will cost, citing security concerns.

Despite the plans, independent experts said the resorts will likely not be brimming with armed guards and checkpoints.

‘The integrated resorts are like a theme park,’ said Mr Ignatius Kang, general manager of Apro Asian Protection.

‘The last thing people will want to experience is being stopped all over the place and questioned.

‘I can’t imagine seeing too many armed guards around. It will dampen the spirit of the place.’

Suggestions for the security features were broached during meetings between resort officials and the Ministry of Home Affairs.

While the decision to fortify the buildings was made before construction began, the plans were revealed for the first time yesterday at the World Security Forum 2008.

The event brings together players in the security industry to identify emerging threats, highlight the use of modern security technology and share expertise.

Spokesmen for both complexes said buttressing the resorts against attacks is a top priority.

No effort has been spared to ensure the security of Resorts World at Sentosa, said assistant vice-president of communications Robin Goh.

The complex will have an advanced surveillance system to monitor attractions, including its casino and Universal Studios Singapore theme park.

Marina Bay Sands’ general manager George Tanasijevich said the company has been collaborating with state officials to develop its security regimen.

‘We have been working closely with the Government to bring the latest technology and the best expertise to ensure the highest level of security at the integrated resort,’ he said.

Source : Straits Times - 09 Oct 2008

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AIG under fire for US$440,000 resort stay -WASHINGTON

AIG under fire for US$440,000 resort stay -WASHINGTON

Congress grills bosses over money spent soon after firm was rescued by US$85b govt bailout

After the US government bailout, AIG executives held a retreat at the luxury St Regis resort in Monarch Beach, California. They ran up a huge spa bill, among other expenses. — PHOTO: ST REGIS

WASHINGTON: On a Tuesday, the company was saved from total collapse by a government loan of US$85 billion (S$124 billion).

By that weekend, the drama had obviously been left behind as AIG executives spent more than US$440,000 of company money on a week-long getaway at an exclusive California beach resort.

The tab, the US House Committee on Oversight and Government Reform was told, included US$23,000 at the hotel spa and another US$1,400 at the salon.

‘They were getting their manicures, their facials, their pedicures and their massages while the American people were footing the bill,’ said Democratic congressman Elijah Cummings.

The Federal Reserve stepped in to save American International Group (AIG) from imminent collapse on Sept 16 with a loan that gave the US government an 80 per cent stake in the insurance giant.

‘Less than one week later, AIG held a week-long retreat for company executives at the exclusive St Regis resort in Monarch Beach, California,’ Democratic congressman Henry Waxman told the House committee on Tuesday.

In what the Financial Times called ‘a moment of drama usually reserved for US court rooms’, Mr Waxman, the Democratic chairman of the House of Representatives’ chief investigative committee, flashed images of a luxury hotel on television screens.

Mr Cummings, a Democrat from Baltimore, one of the poorest cities in the US, pointed out that the rooms cost more per night than some of his constituents faced in monthly mortgage payments - for houses they were now being thrown out of. ‘The American people are paying for that. And they are angry,’ he said.

Invoices showed that room charges were close to US$200,000 for rooms which cost from US$425 to US$1,200 per night. ‘Average Americans are suffering economically. They are losing their jobs, their homes,’ Mr Waxman said. ‘We will ask whether any of this makes sense.’

Mr Cummings also pointed out that AIG spent US$7,000 in green fees at the golf course and US$10,000 on bar tabs as he turned his questions on former AIG chief executive officers Robert Willumstad and Martin Sullivan.

‘I do find it interesting that Mr Willumstad knows nothing about it, but this came just a week after you left. Did you know that, Mr Willumstad?’ he asked.

Mr Willumstad answered: ‘I heard you say that, but I was totally unaware that there was any plan for any conference.’

‘And, Mr Sullivan, I’m curious, what were your views on this?’ Mr Cummings asked.

‘You know, obviously, I left the company many months earlier prior to Mr Willumstad. But if I’d have seen bills like that, I can assure you, as the CEO, I would have been asking questions,’ Mr Sullivan said.

Mr Waxman noted that the longtime former CEO of AIG, Mr Maurice ‘Hank’ Greenberg, ‘told the committee he is too ill to appear today to answer questions’.

‘Mr Greenberg blames Mr Sullivan and Mr Willumstad for the downfall of AIG,’ said Mr Waxman. ‘Many others think it is Mr Greenberg who sowed the seeds that led to AIG’s failure.’

President George W. Bush’s chief spokesman expressed outrage yesterday at the revelation. ‘I understand why the American people would be outraged. I am. It is pretty despicable,’ Ms Dana Perino told reporters.

AIG later clarified in a statement that the event, which had been scheduled last year, was ‘not an executive retreat’.

It added that only 10 AIG employees attended what had been a conference for management to meet the insurer’s leading product distributors.

GOVERNMENT SHOULD DEMAND A REFUND

‘The Treasury should demand that money back, and those executives should be fired.’
- Democratic presidential nominee Barack Obama, commenting on the AIG junket during his debate with Republican John McCain

FRITTERING AWAY TAXPAYERS’ MONEY

‘They were getting their manicures, their facials, their pedicures and their massages while the American people were footing the bill.’
- Democratic congressman Elijah Cummings

EX-BOSS ‘KNEW NOTHING’ ABOUT JUNKET

‘I was totally unaware that there was any plan for any conference.’
- Former AIG chief executive officer Robert Willumstad, when questioned by congressmen about the junket

AGENCE FRANCE-PRESSE, REUTERS

Source : Straits Times - 09 Oct 2008

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Office capital values down 2-3% in Q3

Office capital values down 2-3% in Q3

Easing of potential supply expected as 30% of projects have yet to start

By UMA SHANKARI

OFFICE capital values fell 2-3 per cent quarter on quarter in the third quarter of this year in areas such as Marina Centre and Anson Road/Tanjong Pagar as demand softened, according to a report released yesterday.

The report by DTZ also points out that some redevelopment projects in the pipeline, such as International Factors Building, Robinson Tower and Marina House, have been deferred and the space put back in the market for leasing.

‘There could be more delays in completion, or easing of potential supply, as construction on about 30 per cent of projects in potential supply has not commenced,’ it says.

As the government’s ban on redeveloping office buildings in the central area for different uses will be lifted by end-2009, DTZ believes some planned office projects could be redeveloped for other purposes.

The cutback in potential supply comes as the financial sector, which has been largely responsible for the spike in demand for office space in the past two years, scales back expansion plans.

Many occupiers have shelved expansion plans amid economic uncertainty and are renewing leases at existing premises to avoid relocation costs, said DTZ executive director Cheng Siow Ying.

‘Office occupiers have become more cautious, with many adopting a wait-and-see approach,’ she said. ‘While negotiations for space are still going on, they are taking longer to conclude.’

Average office rents peaked in Q3, with no rental growth during the quarter. Although most landlords are maintaining their asking prices, they are now more flexible with lease packaging, resulting in lower effective rents.

Many tenants continue to relocate to cheaper decentralised offices and converted state properties, while those that qualify for hi-tech industrial and business parks are relocating there, Ms Cheng said. As a result, the island-wide average office occupancy rate eased 0.6 of a percentage point quarter on quarter to 96.3 per cent in Q3.

On the other hand, demand for industrial space, particularly in business parks, remained healthy. Business park occupancy averaged 92.5 per cent in Q3, up 2 percentage points from Q2.

DTZ says how far the office market will fall depends largely on how the global financial crisis plays out. There could be an increase in office sub-letting if companies start consolidating their operations and rationalising their use of space, it says.

Source : Business Times - 09 Oct 2008

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UK throws £500b life line to leading banks - LONDON

UK throws £500b life line to leading banks - LONDON

Infusions to provide short-term liquidity and new money for recapitalisation

By NEIL BEHRMANN

IN LONDON

THE British government has pulled out all the stops to throw a £500 billion (S$1.3 trillion) life-line to leading UK banks, following in the footsteps of several European nations and the US.

In another major step in tandem with the US and European nations, UK interest rates were slashed by half a percentage point to 4.5 per cent. Shares on the London Stock Exchange initially fell following the bailout announcement, rallied when interest rates were cut and then sagged again.

The plan will see the government spend up to £50 billion - the equivalent of £2,000 for every taxpayer - on buying preference shares in the banks in order to boost their capital. Half is available immediately, while a further £25 billion can be used if necessary.

The government will also make £250 billion available to underwrite the banks’ medium-term debts in an attempt to prevent a potentially dangerous funding gap in the next few years.

Meanwhile, the Bank of England (BOE) will inject a further £200 billion into the money markets under its Special Liquidity Scheme. This enables distressed banks to swap risky mortgage securities for Treasury bonds.

‘I believe that it (the plan) will go a long way (but) I’m not ruling anything out.’

- Alistair Darling

The scheme had previously been limited to £100 billion. Following discussions convened by the UK Treasury, several major UK banks and the largest building society confirmed their participation in a government-supported recapitalisation scheme.

They are Abbey, Barclays HBOS, HSBC, Lloyds, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered. Other banks and financial institutions can apply for inclusion. HSBC and Standard Chartered subsequently issued a statement that they did not intend to request any capital injection from the UK government.

The proposals are intended to provide sufficient liquidity in the short term and make available new capital to strengthen the banks’ resources and restructure their finances.

The infusion is also aimed at ensuring that the banking system has the funds necessary to maintain lending in the medium term. Until markets stabilise, the BOE will continue to conduct auctions to lend sterling for three months, and also US dollars for one week, against extended collateral, the UK Treasury said.

The move by the UK authorities follows the nationalisation of Northern Rock, the rescue of Bradford & Bigley and the government-encouraged Lloyds Bank takeover of HBOS.

Despite the latest plan, several analysts fear that banks will remain under considerable pressure and will now be exceedingly cautious in providing loans in an economy that is already in recession.

A major proportion of individual savings is tied up in a declining residential property market and defaults are increasing.

During the long economic expansion which began in 1993 and peaked in 2007, debt levels of individuals and corporations increased markedly. Since there will be moves to reduce the debt burden, consumption is expected to decline, causing a fall in profits and investment and a rise in unemployment.

An overvalued pound in recent years and the shift of plants to China, India, Eastern European and other emerging nations have diminished the British manufacturing sector. The financial sector contributes a major proportion of revenue to both the UK and London economy and the downturn in these parts of the economy could worsen the recession. The UK budget deficit and borrowings are thus expected to soar.

The bailout, belated interest rate cut and depreciation of sterling against the euro, dollar, yen and Asian currencies are expected to reduce the recessionary impact.

But it is still expected to be nasty. With energy and raw materials prices now in a downtrend, there will be room for further interest rate cuts and reflation.

The part nationalisation of banks implies that the government will now have a say in the management of the companies, which in the main has been exceedingly poor and reckless.

Chancellor Alistair Darling warned that executive salaries and bonuses should be limited, a popular move with the electorate. The government will also lean on banks to provide finance for small businesses and people who are at risk of losing their homes.

Asked what would happen if the plan did not work, Mr Darling said at the press conference: ‘I believe that it will go a long way (but) I’m not ruling anything out.’

That left open the possibility of more drastic action, such as the nationalisation of more major banks.

Shares in the vulnerable banks responded positively to the news. HBOS soared by 55 per cent at one stage and Royal Bank of Scotland by 33 per cent. But shares in HSBC, Standard Chartered and Barclays fell.

Shadow chancellor George Osborne said that the Tories, who are well up in the polls, would be ‘constructive’ and backed much of the plan. He called on ministers to ensure that families and businesses benefited most from the taxpayer funds put at risk.

‘I think that the key part of the package is not so much the capital injecting but the guaranteeing of the interbank market. That’s a huge sum of money,’ said Mr Osborne.

‘Those guarantees are quite difficult to lift once they have been put on, but clearly the biggest problem is that banks have not been lending to each other and the Bank of England has become not just the lender of last resort, but the lender of only resort.’

Source : Business Times - 09 Oct 2008

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Shock rate cuts to jolt markets back to life-NEW YORK

Shock rate cuts to jolt markets back to life-NEW YORK

Fed and other central banks join hands in unprecedented move to fight crisis

By ANDREW MARKS

NEW YORK CORRESPONDENT

AS Europe bled and Asian markets licked their wounds, several central banks across the world, led by the US Federal Reserve, announced a coordinated interest rate cut in an effort to stem the global financial crisis.

Face of the market: A broker in London responding to yesterday’s news, including the Bank of England rate cut
This is the latest of what has become an increasingly urgent series of measures to cure investors of the rampant fear of a worldwide systemic collapse of the financial markets.

The half percentage point global rate cut also represented the first time in the growing crisis in which several central banks, representing governments from around the world, have acted in unison to overcome frozen credit markets, combat swooning economies and prevent further bank failures.

The Fed cut its key lending rate to 1.5 per cent, the European Central Bank cut its rate to 3.75 per cent and the Bank of England to 4.5 per cent - each with a half-point slash. The central banks of Canada, Sweden and Switzerland also reduced rates, while the Bank of Japan expressed its strong support of these policy actions, the Fed said in a statement released in the midst of another dramatic decline in Asian and European markets before the US stock market began its trading day yesterday.

The coordinated policy action initially produced a turnaround in global stock markets, paring losses, which in some cases were approaching the 10 per cent level. But the gloom would not go away so easily. In London, for example, the FTSE swung wildly from a 6 per cent decline to move into positive territory before slipping back again, to close at 4,366.69 down 238.53 points or 5.18 per cent.

Wall Street reacted cautiously to the overnight moves at the opening bell yesterday morning. The Dow Jones Industrials, which ended on Tuesday with a late plunge that produced the blue-chip index’s fourth decline of more than 5 per cent in just two weeks’ time, climbed more than 100 points in the first few minutes of trading, reaching a 1.9 per cent advance before resuming its fall to 9,256.99 points by midday in New York on investor fears that the rate cuts would fail to unfreeze the credit markets and avert a global recession.

US investors’ enthusiasm was being tempered by the latest sobering economic data released yesterday morning, signalling the rising likelihood that the financial market turmoil will make the US recession a more prolonged and severe one than economists were projecting just three weeks ago. Initial results from US retailers showed a dramatic slowdown in September sales, indicating that the upcoming holiday shopping season will be a gloomy one.

‘I don’t know that a rate cut in and of itself is going to do all that much to reverse the economic decline or stem the fear in the markets, but the fact that the Fed and all these other central banks are acting in concert to cut rates should reassure investors that at least the governments of the world’s major economies are finally taking this crisis seriously enough to work together to prevent the chaos from further enveloping the global economy,’ said Sam Stovall, chief investment strategist at Standard & Poor’s. ‘The psychological impact of these rate cuts, along with Britain’s announcement of a massive bailout of its banks worth hundreds of billions of dollars, should at least calm the extreme levels of panic that we’ve witnessed the last couple of days.’

In England, Prime Minister Gordon Brown proclaimed ‘the global financial market has ceased to function’, in explaining the need for his country’s rescue plan, which will amount to a minimum of US$350 billion.

The Fed had been resisting enacting further rate cuts since April, despite sagging equities and credit markets, but pressure for further monetary policy easing had been growing by the day. And in a speech on Tuesday, Fed chairman Ben Bernanke hinted that he was inclined to reduce the fed funds rate, the rate at which banks lend one another money, given the severe threat to the flagging US economy that the market chaos has entailed.

In its statement, the Fed, which also approved a 50 basis-point decrease in the discount rate to 1.75 per cent, said it reduced rates ‘in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures’, adding that ‘incoming economic data suggest that the pace of economic activity has slowed markedly in recent months’.

‘Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation,’ the Fed’s statement read.

Source : Business Times - 09 Oct 2008

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