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G7 to meet on world financial crisis
(Agencies)
Updated: 2008-10-10 08:36 NEW YORK/WASHINGTON -- Fear-driven selling sent US stocks plummeting to five-year lows on Thursday, on the eve of a G7 meeting of economic powers to try to halt a global spiral of financial distress and slowing growth. The Dow dived below 8,600 for the first time since May 2003 and the S&P 500 dropped 7 percent as credit markets buckled. Both the Dow and S&P 500 have now lost more than 20 percent over a seven-day down streak. "The market is in a phase now that it doesn't believe in anything," said Sasha Kostadinov, a fund manager and analyst for Shaker Investments in Cleveland, Ohio. "I don't know what will turn the sentiment."
The punishing stock market decline in the final hour of trade added to pressure on US policy makers to do more to stem the crisis -- even after approval of a $700 billion bailout fund and an emergency rate cut by the US Federal Reserve over the past week. At the center of a financial crisis now almost a month old, credit markets remained distressed. With banks desperate to protect capital, the interbank cost of borrowing dollars rocketed. Three-month interbank rates for dollar loans hit their highest level of the year. In its next move to stem the crisis, the US Treasury plans to start injecting capital in US banks as soon as the end of October, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking. That partial nationalization of American banks would represent an enlarged role for the US government as the lender and investor of last resort, and would follow moves by European governments to shore up the capital of struggling financial institutions there. White House chief economic advisor Edward Lazear said injecting capital into the financial system could be quick and effective. "It's not going to take us a long time to do this. The markets will be reassured in very short order," he said. At its Thursday close of 8,579, the Dow Jones industrial average had lost 39 percent over the past year. "It's a self-feeding frenzy -- you go to sleep and hear Japan is down, you wake up and hear Europe is down then you come in to work and markets here are down," said Thomas Russo, partner at Gardner Russo Gardner. There was no sign of an end to that grinding cycle of loss. Nikkei futures that are traded in Chicago closed down 7 percent from their close Thursday in Osaka. European stocks had lost more than 2 percent on Thursday. "This is not the bottom yet. We need to have more bad news discounted in the marketplace, we need to officially hear we are in a recession, we need to have better visibility on company earnings and the credit market needs to show signs of relief before things get better," said Keith Wirtz, chief investment officer of Fifth Third Asset Management. Earlier, South Korea and Taiwan cut interest rates on Thursday following the coordinated cuts on Wednesday by major central banks including the US Federal Reserve. Japan was considering other measures in the face of new recessionary signals.
"Various countries have done bits and pieces. Nobody has done all of them," said David Mackie, head of Western European economic research at JPMorgan. "It's not entirely obvious that these measures are turning the tide," Mackie said. "At the end of the day, if you socialize enough of the financial system, it has to work." One option for policymakers could be for other countries to follow Britain's pledge to guarantee short-term interbank lending. |
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