October 26, 2008 / 12:45 AM / 9 years ago

Recession fears haunt markets

<p>A trader monitors stocks at a Saudi Bank in Dammam October 26, 2008. REUTERS/Stringer</p>

NEW YORK/LONDON (Reuters) - Fears of a deep global recession dominated investor sentiment as financial markets in the Asia-Pacific region began to reopen on Monday after last week’s worldwide slide in stock prices and currency collapses.

There were early indications that governments and central banks will take further dramatic action to prop up the global financial system this week.

The Japanese Finance Minister called a news conference for 9:00 a.m. (8:00 p.m. EDT), and the Bank of Korea announced an emergency meeting for Monday morning amid forecasts from analysts that it will announce an interest rate cut.

But there is growing concern that intervention by authorities will not be enough to prevent companies from slashing production and jobs as sales get hit and financing remains difficult.

Initially, financial markets were relatively stable in Asian trade on Monday.

Standard & Poor’s 500 December index futures opened the week slightly higher, gaining 3.0 points at 869.80 after about an hour, though the Australian dollar traded close to record lows against the yen and near 5-1/2 year lows against the U.S. dollar. However, Japan’s stock market is expected to decline, threatening to take the Nikkei average to a 26-year low.

The International Monetary Fund on Sunday reached an agreement in principle with Ukraine for a $16.5 billion loan package to ease the effects of the financial crisis.

The IMF also said that it will announce a “substantial financing package” for Hungary in the next few days that will include financing by the European Union and some individual European governments.

More such deals are expected as other emerging market governments turn to the IMF for help.

The U.S. Federal Reserve is widely expected to announce a 50 basis-point cut in overnight rates on Wednesday that would take them to 1 percent, the lowest level since June 2004, with some expecting an even deeper reduction to 0.75 percent.

Advance third-quarter U.S. economic growth data due on Thursday is expected to show a 0.5 percent contraction in gross domestic product after 2.8 percent growth the previous quarter.

“Increasingly, the signs point to a deep and synchronized global recession,” JPMorgan economist Bruce Kasman said.

“It is still too early to accurately gauge the depth of the downturn, as the outlook depends on how well policy actions contain the financial crisis.”

A series of warnings about worse-than-expected results from major international companies last week, including Japan’s consumer electronics maker Sony, French carmaker PSA Peugeot Citroen and online retailer Amazon.com, underlined the concerns that prospects are going to get a lot worse before they get better.

“We are now in the midst of a full-blown global financial crisis,” said Citigroup analyst Robert Buckland. “Policy-makers have been unable to calm the storm, although the increasingly aggressive response offers some hope. The earnings downturn looks to have much further to go.”

<p>Saudi traders monitor stocks at a Saudi Bank in Dammam October 26, 2008. REUTERS/Stringer</p>

Asian and European leaders closed ranks over the weekend to bolster confidence among investors facing the worst financial crisis in 80 years.

PROTECTING THE REAL ECONOMY

“We must use every means to prevent the financial crisis impacting growth of the real economy,” Chinese Prime Minister Wen Jiabao said on Saturday at the end of a two-day summit in Beijing of 43 Asian and European leaders.

China’s central bank governor, Zhou Xiaochuan, was quoted on Sunday as saying that Asia’s second-largest economy was in good condition but needed to be on guard to fend off risks.

Investment in infrastructure and expansion of consumer demand could help cushion the impact of weakening exports, he said, adding that the central bank would work out an advance plan to provide emergency help to banks if needed.

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Japanese Economics Minister Kaoru Yosano said on Sunday the government should increase its bank bailout plan to around 10 trillion yen ($106 billion) from two trillion.

The Japanese government is poised to announce steps on Monday to stabilize markets, including purchases of bank stocks by a government body, and is considering tougher rules on short selling and changes in mark-to-market accounting rules, the Nikkei business daily reported on Sunday.

Mitsubishi UFJ Financial Group, Japan’s largest bank, is considering raising up to 1 trillion yen ($10.6 billion) to replenish its capital, people familiar with the matter told Reuters.

In the United States, more banks began to get or seek money from the government. Washington Federal Inc said on Sunday it would get a $200 million cash infusion from the U.S. government, while Fifth Third Bancorp announced it had applied for $3.4 billion under the capital purchase program.

Earlier on Sunday, a source familiar with the Treasury Department’s thinking told Reuters that KeyCorp, Zions Bancorp and Capital One Financial Corp were some of the banks that will receive cash under the program.

Four other banks, including PNC Financial Services Group Inc, announced Friday they would participate in the second round of capital injections under the U.S. government’s bailout program.

Kuwait’s central bank was forced to step in to support Gulf Bank, hit by derivatives trading losses, prompting the government to announce it would guarantee deposits at local banks.

Saudi Arabia unveiled plans to deposit 10 billion riyals ($2.67 billion) into the Saudi Credit Bank, established to extend interest-free loans to poor citizens.

Gulf markets tumbled to multi-month lows on Sunday. Qatar’s main index plunged 8.93 percent, Oman’s sank 8.29 percent, Dubai dropped 4.74 percent and Saudi Arabia’s index slipped 1.66 percent after an 8.7 percent slide on Saturday.

And the Polish government plans soon to introduce more measures to help its banks weather the global financial crisis, including state guarantees and loans, according to the draft of a bill seen by Reuters on Sunday.

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