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Worries over GM and Morgan Stanley resurface

Fri, Oct 10 2008, 07:20 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

Worries over GM and Morgan Stanley resurface. Early rumours that the G7 economies are set to provide a blanket guarantee for all interbank lending lifted sentiment and helped the Dow post a quick 180pt rally in opening trade. However, the recovery proved fleeting. GM tumbled as much as 22%, heading towards its lowest close in 58 years on analyst reports that the company may not receive $25bn in Government loan guarantees in time to help them survive the crises in the credit and equity markets. Markets were also transfixed by Morgan Stanley, with the stock sliding 14% on chatter that Mitsubishi UFJ might pull out of its deal to buy a stake in the company. The lifting of the short-selling ban probably did Morgan Stanley no favours either. Reports from the US Treasury that the government could start to inject capital into US financial institutions “within weeks” did little to lift spirits. The Dow continued down to fresh 5-year lows, shedding more than 500pts at the time of writing.

Overnight trade in FX markets initially took the lead from Asia, with an ongoing bias toward paring back of risk aversion trades. That saw the USD on the back foot for much of the night, but it regained ground as equities soured into the close. NZD and AUD were the only major currencies to end the day higher against the USD, though both have given back some of their gains. The AUD maintained its recent record as the more volatile of the two, rising from yesterday’s low of 0.6630 to a high of 0.7130, before sliding back below 0.69 this morning. Similarly, the NZD made it as far as 0.6250, but has since fallen back below 0.61.

US initial jobless claims fall 20k to 478k. The hurricane impact is starting to wane but the underlying job market story is deteriorating still. Other US data included a 0.8% rise in wholesale inventories in August.

Japanese machinery orders fell 14.5% in August. This is a large decline, even by the standards of this wildly erratic series. The fall was more moderate if private orders only are considered, and foreign orders actually rose, but the bottom line is that the domestic demand for capital goods is weakening sharply.

UK house prices down 1.3% in Sep. The HBoS measure backed the earlier Nationwide BS figures, showing a similar 12.4% yr annual pace of house price decline. Adding to the economic woes of the UK, the trade deficit blew out to over £8bn in revised July data and held there in August. The report showed sluggish expports, with further deterioration in prospect as the global economy grinds towards recession.

Outlook

The extraordinary ongoing developments in world financial markets make it impossible to forecast the NZD with any confidence (though more volatility is a near certainty). However, it is important to recognise that the exchange rate serves as an important safety valve for the economy – the NZD will fall as far as it needs to in order to buffer the New Zealand economy from the worst of the financial crisis.

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Published on  Fri, Oct 10 2008, 07:23 GMT