Morning Update

World Markets Hemorrhage

Thus far, a laundry list of items implemented by the Treasury Department, the Federal Reserve, and governments and central banks around the world have been largely ineffective in breaking the logjam in the credit markets and calming equity markets. Investors have reacted violently by dumping stocks in what can probably be best described as panic selling over the past week, and today has been no exception. Markets in Asia plunged in overnight trading, and Tokyo had its worst one-week ever, while Europe quickly followed suit. Despite speculation that the US may announce dramatic moves that could include guaranteeing counterparty debt or backing all bank deposits, US markets are down sharply in early trading but are off lows, and the same factors that have stunned investors are still in play; namely, fears that the paralysis in the financial system will severely hobble the economy in the coming months. In equity news, Mitsubishi UFJ Financial Group said it has no plans to back away from its investment in Morgan Stanley, General Electric matched, and General Motors said it is not considering bankruptcy. Treasuries are lower, the trade deficit narrowed, and import prices fell sharply.

Import prices fall and trade gap narrows

The Import Price Index fell 3.0%, greater than the Bloomberg forecast of a 2.8% decline, but August was revised from -3.7% to -2.6%. Year-over year, prices slowed from an upwardly revised 18.7% to 14.5% as import inflation begins to fade amid falling commodity prices, slackening demand, and the stronger dollar.

The trade balance narrowed from $61.3 billion in July to $59.1 billion in August, nearly matching the forecast of $59.0 billion.

The steep drop in the overnight Libor rate may be indicating that the coordinated rate cut among central banks and massive liquidity injections may be starting to have an impact by thawing out the shortest term loans; however, the rate has been extremely volatile in recent days, and its still too soon to say whether this is the beginning of the much-anticipated thawing in the frozen credit markets. The rise in the 3-month rate is signaling that banks are avoiding three-month loans because they are afraid the borrower could default before the 90-day term is up.

World markets roiled

Yesterday's late-day slide quickly extended to Asian and European markets, sending stocks into a tailspin as investors stampede out of riskier assets. Most markets across Europe are down anywhere from 8-9% in afternoon action, as traders dump mining, steel, and banking companies. Insurers are also under extremely heavy pressure amid worries about future investment losses and the possible need to raise capital. In a sign of what may be to come for the global economy, Russia's Severstal, the country's largest steelmaker, said it will cut production by up to 30% this month due to waning demand and will review it full-year outlook. Additionally, Russian authorities did not allow for the start of trading, markets in Indonesia, Austria and Ukraine were halted, and Iceland remained closed.

The Nikkei 225 Index was down over 11% at the opening before finishing down 9.6%. The rush from riskier assets and into the yen added to the bearish mood since the strong yen is likely to reduce the competitiveness of overseas sales. The darkening outlook for the global economy also pressured sentiment for the export-dependent economy, while the failure of a smaller life insurance company and the first bankruptcy of a real estate investment trust added to jitters. For the week, the benchmark average in Tokyo fell 24%. Elsewhere around Asia, markets ended much lower, with Australia falling 8.3%, India and Hong Kong losing 7%, and South Korea finishing down just over 4%.