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Asia Market Update

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Asian markets divided over implications of FRE/FNM bailout

Mon, Sep 8 2008, 04:20 GMT
by Eben Esterhuizen

TradeTheNews.com

- A summary of the FRE/FNM bailout plan: The companies will open Monday morning, only with stronger backing for the holders of MBS, senior debt and subordinated debt. The U.S. is now buying MBS securities direct from GSEs in the open market, and there is no explicit limit specified. Herb Allison, Vice Chairman of Merrill Lynch, is to be the new CEO of Fannie Mae and David Moffett, Vice Chairman and CFO of US Bancorp, the CEO of Freddie Mac. In order to conserve capital, the common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will continue to remain outstanding. Common shareholders are being massively diluted as preferred of a preferred/warrant deal that is being held out as offering taxpayers upside.

- Initial market reaction to FRE/FNM bailout: U.S. officials hoped that the FRE/FNM bailout would remove a large source of financial uncertainty, but Asian markets were divided on the implications. Early indications show that the news might be good for equities, and with few meaningful U.S. economic data releases until later in the week there isn't likely to be much resistance for a near-term stock rally. The USD sold off in Asia while stocks rallied, raising a red flag for some investors. "If the bailout is positive for equities and the U.S. economy it should be positive for the (dollar)," said Jonathan Barrett at Commodity Broking Services. Some investors think that the expansion of debt on the U.S. Treasury's balance sheet could have inflationary implications, a view which supported gold prices. But it's tough to say how much of gold's move higher is related to the FRE/FNM headlines or speculation surrounding this week's OPEC meeting. Several mainstream newspapers pointed out that the bailout treats the symptom of the problem, but not the underlying cause: foreclosures, supply.

- Market digests timing of the move: Some commentators have suggested that the timing could have been influenced by political factors, meaning that regulators did not panic for whatever reason. "The precise timing of the decision to guarantee Fannie and Freddie explicitly with taxpayers' funds was probably driven by politics and moral philosophy more than economics," wrote Anatole Kaletsky at The Times. "The Treasury's reason for choosing this weekend, rather than any other, was partly dictated by the U.S. election cycle - to avoid accusations of partisanship, the announcement could not be made during the political conventions, nor delayed until too close to polling day." Other media outlets, most notably The New York Times, have reported that the bailout plan "came together hurriedly after advisers poring over the companies' books for the Treasury Department concluded that Freddie's accounting methods had overstated its capital cushion." If the bailout was organized in a hurry, it raises questions about the credibility of any stocks rally. In summary, most analysts would probably agree that this is a small step in the right direction, but inflation might become an issue if the U.S. government prints money to bail out the economy.

- Cost of FRE/FNM bailout: According to reports, William Poole, the former President of the Federal Reserve Bank of St. Louis, said the U.S. government's takeover of Fannie Mae and Freddie Mac could eventually cost taxpayers as much as $300 billion. It is impossible to know the final cost of the bailout at this stage, but if Poole is correct the cost to the U.S. taxpayer will be double the value of the recent stimulus package, projected at $152 billion for 2008. "Our new Chinese creditors have demanded their first payment," wrote a blogger at Economic Populist. "The bottom line as to why this is happening is pretty clear: out creditors are getting nervous about the U.S.'s financial condition," echoed Hale Stewart at HuffingtonPost. "They want to make sure they get paid. So Paulson and everybody else involved is making sure that happens."

- Politicization of the FRE/FNM bailout: The Chinese now recognize that U.S. Treasury Secretary Paulson intends to stand behind the two mortgage insurers, but "whether John McCain or Barack Obama will stand behind them when Paulson has not locked them in remains to be seen," wrote Robert Gottliebsen at BusinessSpectator. The FRE/FNM is likely to be politicized over the coming weeks ahead of the elections, with U.S. Senator Dodd already requesting a hearing on the matter.

- At 0:05 EDT Japan's Nikkei +3.25%, the S&P/ASX200 is +3.61%, South Korea's KOSPI is +4.60%, Hong Kong's Hang Seng index is +3.67%, and the Shanghai composite index is -2.18%. The S&P500 futures contract gained 2.97% since the U.S. close, last trading at 1,278. Forex between 17:00 EDT and 0:08 EDT: EUR/USD +1.01%, GBP/USD +1.61%, USD/CHF -0.26%, USD/JPY +1.02%, AUD/USD +1.80%, NZD/USD +2.03%, EUR/JPY +2.03%, AUD/JPY +2.82%

- Equities: Most Asian stock indices rallied on the U.S. Treasury's bailout of FRE/FNM. Financials are leading the charge, with Mitsubishi UFJ (+7.5%), National Australia Bank (+7.0%) and the Bank of China (+4%) all trading sharply higher. Despite broad gains in Asia, Chinese equities are sharply lower, with property developers dragging on sentiment.

- Commodities: Nymex crude oil gained +2.58% between 18:00 EDT and 0:03 EDT, last trading at $108.98/bbl. Hurricane Ike is traveling near Cuba and is expected to move into the Gulf over the next two days. Ahead of the storm's approach, Royal Dutch Shell delayed deploying most of its staff back to its offshore platforms in the Gulf of Mexico as a precaution. Spot gold gained 1.97%, last trading at $818.50.

Published on  Mon, Sep 8 2008, 04:23 GMT