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Saturday, October 04, 2008
The bloodletting continues...
The massive rescue plan, designed by the Bush government to cleanse the US financial system and restore confidence in Wall Street, was shot down by the House of Representatives amid continued political wrangling. The move triggered one of the worst selloff in US stocks and dealt a brutal blow to bipartisan efforts to pull the world's largest economy from the brink of collapse, despite repeated warnings of a major catastrophe by White House. The Bush regime, however managed to win the support of the Senate after incorporating a few changes in the bill. The measure was scheduled for a fresh vote in the House on Friday.
In the interim period, there was more mayhem in the western financial space, with the contagion spreading to Europe. Citigroup stepped in to rescue Wachovia, but by the end of the week the troubled bank abandoned that deal and found another suitor in Wells Fargo.
Across the Atlantic, regulators and governments threw lifelines to European banks. The Dutch, Belgian and Luxembourg governments partly nationalised Fortis amid uncertainty about its ability to sell assets it holds in ABN Amro. Dexia, a Belgian-French bank, received a €6.4bn (US$9.2bn) government cash injection. In the UK, Britain Bradford & Bingley, a specialist in buy-to-let mortgages, was nationalised and some assets sold to Spain’s Santander. Hypo Real Estate, Germany’s second-largest property lender, obtained €35bn (US$51bn) in credit guarantees from the government and the banking industry. And Glitnir, Iceland’s third-largest bank, was nationalised.
Ireland’s government took the extraordinary step of guaranteeing all deposits in six Irish banks after their share prices suffered huge losses. The guarantee covers around €400bn (US$575bn) of liabilities, more than twice Ireland’s gross domestic product (GDP). Some politicians, especially in Britain, grumbled that the Irish move may be contrary to European Union (EU) competition law.
The Reserve Bank of India (RBI) stepped in to reassure depositors that ICICI Bank was financially sound amid reports of a wave of cash withdrawals from the bank. And Russia provided a further US $50bn to increase liquidity in its banking system. This comes on top of a US $130bn package doled out to Russian banks in the form of loans, tax cuts and delayed tax payments.
Oil slips after job report, $700B bailout
Oil prices slipped in volatile trading on Friday after Congress approved a historic $700 billion bailout of the nation's teetering financial industry as the longterm health of the global economy remained questionable.
Investors bet down the price for crude early in the day when the US Department of Labor reported that employers slashed payrolls in September by the greatest amount in more than five years, but got back into the market when Wells Fargo Co stepped in to buy Wachovia Corp. for $15.1 billion.
Labor Department figures showed that payrolls shrank by 159,000, more than the 100,000 economists predicted. The nation's unemployment rate remained flat at 6.1 per cent, as expected.
And few believed that the unprecedented bailout package, passed early in the afternoon, would rekindle the global appetite for energy any time soon.
"I don't think it will be capable of putting a floor under oil prices," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates.
Light, sweet crude for November delivery fell 9 cents to settle at $93.88 a barrel on the New York Mercantile Exchange.
On Thursday, prices closed at their lowest level in two weeks, tumbling below $94 a barrel on doubts that a revamped bailout plan will be enough to avoid a protracted economic slump. Settling at $93.97 a barrel, the price was the lowest since Sept. 16.
Ritterbusch noted demand deterioration is not only intact, "it's been accentuated by this financial rescue effort and the subprime loan issues."
November Brent crude fell 31 cents to settle at $90.25 a barrel on the ICE Futures exchange.
The US Senate overwhelmingly approved a sweetened bailout plan on Wednesday after House lawmakers stunned investors earlier in the week by rejecting it.
The Senate added $100 billion in tax breaks and more in bid to win over enough dissenting House votes.
"Approving the bailout may create a little bounce and alleviate the negative sentiment temporarily," said John Vautrain, an energy analyst with consultancy Purvin & Gertz in Singapore. "The problem is US gasoline demand has been off one heck of a lot."
Statistics from the US Labor Department released on Thursday showed more signs of a weakening economy, adding to concerns about falling demand.
In a sign of how far consumers are pulling back, retail gasoline prices fell for the 11th week in the last three months. There was a brief pause in price declines because of hurricanes Gustav and Ike, which disrupted supplies in the Gulf of Mexico.
The Energy Information Administration reported that as of Monday, prices fell 8.6 cents to a national average $3.632 a gallon.
That's still 31 per cent more than last year, and high gasoline prices continue to squeeze consumers.
On Thursday, the US Commerce Department said factory orders in August plunged by 4 per cent compared to July, a much steeper decline than the 2.5 per cent drop analysts expected and the biggest setback since a 4.8 percent plunge in October 2006.
"All the indicators have been very negative," Vautrain said. "There's been an economic wallop, and people don't have as much money to spend."
Significant gains over the past days by the dollar against the euro also have helped push down prices, but the greenback lost some ground early Friday.
Investors tend to buy commodities like oil to defend against dollar weakness and a hedge against inflation, but return to the US currency as it strengthens.
The 15-nation euro rose to $1.3856 in Friday trading.
In other Nymex trading, heating oil futures rose 4.75 cents to $2.6620 a gallon, while gasoline prices fell 2.67 cents to $2.2283 a gallon. Natural gas for November delivery fell 12.3 cents to $7.358 per 1,000 cubic feet.
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