From Adam Carr's morning note at ICAP Securities:
"Nothing lasts forever and that euphoric reaction to the Paulson plan ended with a thud last night. Legitimate concerns are being raised as to how assets will be priced in these reverse auctions, and more importantly whether it will be enough to stop the blood shed.
This is a 10 trillion dollar + market we’re talking about…$700bn sounds like a big number and it may help a select number of larger financial institutions avoid insolvency, but it may not be big enough to stop the rot, to stop ongoing asset price depreciation and insolvency for the broader market – regional banks etc. It certainly isn’t enough to avoid recession.
Think I’m being pessimistic? Freakin’ Mcdonald’s reported last night that the Bank of America can’t lend to them – Maccas!!! I appreciate that the BoA has it’s hands full – but this is symptomatic of a broader problem...
...which is why US 3m libor hasn’t come off that much, setting at 3.19% from 3.21% the previous day. 3m libor-ois is currently at 127bp, down a bit, but still very wide (80bp just 2 weeks ago).
So no-one was taking any notice of the ratings agencies as they tried to talk up the US and its credit rating – maintained at AAA. The USD dropped over 3 big figures to 1.48 EUR (biggest fall in 9 years), carrying the Aussie back over 0.85, before settling a little over 0.84. That drop in the USD and the fact there was nowhere else to run saw strong gains in commodities. Oil spiked about 15% higher to $120 (from $104 biggest one day jump ever) and gold was up a further $35 (or 3.3%) to $902.
Equities were given from the open - the ban on short-selling financial stocks not helping a great deal. Financials were hit particularly hard, falling 8.5% in the session, though Morgan Stanley initially bucked that trend as Mitsubishi said it was buying up to a 20% stake in the company (ended 12c lower). The broader market was down 3.8% as measured by the S&P500 (1207.1), the Dow dropped 372pts (or 3.3%) to 11015.7), while the NASDAQ fell 4.2% (21787.9). Aussie futures fared only a little better, the SPI falling 2.2%."