Morning Update

A flood of money

The Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank announced coordinated measures early this morning designed to alleviate the liquidity crunch.The FOMC authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines), which will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks.

The overnight Libor rate in dollars fell from 5.03% to 3.84%, and the British Bankers Association said that money markets are still volatile but pressure eased from yesterday. Still, the three-month Libor continued to increase, rising from 3.06% to 3.20%. The Fed said that the central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.

Weekly initial jobless claims increased 10,000 to 455,000, above the forecast of 440,000. The four-week moving average increased 5,000 to 445,000, and continuing claims fell 55,000 to 3,478,000. The Labor Department said the rise was due to the impact from Hurricane Gustav. However, the level near 450,000 indicates the labor market remains very weak.

HBOS acquired

Stocks in Europe jumped on the announcement of the synchronized central bank actions as conditions in short-term credit markets eased somewhat. Banking issues are pacing the broad-based advance, with UBS (UBS $13) up over 10%, and shares of London's largest mortgage lender HBOS (HBOOY $3) are advancing over 50% after confirming it will be acquired by Lloyds TSB Group (LYG $19) in an all-stock deal. Valued at 12.2 billion pounds ($22 billion), the purchase will create a mortgage giant that will hold over one-third of all mortgages in the UK. Despite the concentration, most analysts expect regulators to approve the combination in order to relieve pressure on strained markets. Elsewhere, shares of Volkswagen (VLKAY $67) continue to move higher after Porsche (POAHF $117) said Tuesday that it increased its stake in the automaker by nearly 5 percentage points to 35.14% and is still eyeing at least a 50% stake.

Separately, markets in Russia remain closed after losses over the past couple of days rivaled the 1998 debt crisis. The stock exchange will re-open tomorrow, and monetary officials plan to pump almost $20 billion into the financial system, according to President Dmitry Medvedev. Medvedev believes that efforts being taken will stabilize markets, but the government is willing to take "extra measures" if needed.

Asia stumbles

Asian stocks reacted poorly to the sharp sell-off on Wall Street yesterday, with shares in Tokyo, South Korea, and Taiwan losing over 2%. News that the world's major central banks are acting together to ease the liquidity crisis helped the Hang Seng Index in Hong recover from steep losses and finish nearly unchanged, while markets in India managed a modest advance. The latest action is likely to bring short-term comfort to global markets, but investors remain on edge and gold prices are continuing to gain ground following a record one-day rise yesterday.