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Five Trillion Wiped off Global Stock Markets - Fed Emergency Interest Rate Cut Rumors

Forecasts / Financial Crash Jan 22, 2008 - 10:19 AM GMT

By: Adrian_Ash

Forecasts

THE GOLD MARKET bounced off a 2.1% slump at the London opening on Tuesday as global stock markets attempted to steady on wild rumors of emergency interest-rate cuts.

Following Monday's torrid action in Asia and Europe , the loss of world equity value for 2008 to date is now put above $5 trillion.


Investors looking to Buy Gold today, in contrast, found the metal trading only 5% off last week's all-time record high. The AM Fix in London was set at $862 per ounce, just as the FTSE 100 index crept up to show a 0.5% gain.

It had stood almost 4% lower during the first hour of trade.

"There are all sorts of rumors flying around, particularly surrounding the likelihood of the Federal Reserve cutting rates ahead of the scheduled meeting next week – or even of co-ordinated action between the US, UK and European Central Bank," according to Martin Slaney of GFT Global Markets.

"There is a good chance that the Fed will cut by 50 basis points today given what is happening with stock prices," reckons Divyang Shah of Commonwealth Bank.

Buoyed further by this cheap-money chatter, government bonds continued to rise alongside the US Dollar and Japanese Yen this morning in what one broker called a "pure panic-driven flight to safety."

The dash for cash pushed the yield on two-year US Treasuries down to 2.06% – a four-year low barely half the rate of US consumer-price inflation – as the Gold Market bounced off $850 per ounce and Japanese stocks closed out their worst session in more than 10 years.

"Everything is down, not just the Gold Price ," noted Ronald Leung of Lee Cheong Gold Dealers in Hong Kong to Bloomberg earlier.

"We still see some support at the $845-$850 level from short-covering and dip-buying, and I think gold is still in a long-term bull trend."

On the currency markets the British Pound hit an 18-month low vs. the Yen beneath ¥205.00, and the Euro fell to a one-month low on the currency markets beneath $1.4370.

Hong Kong stocks meantime dropped 8.7% of their value to stand fully one-fifth lower since New Year's Day. The Indian Sensex sank 9.5% at the opening in Mumbai, and trading was briefly suspended.

"There is no reason at all to allow the worries of the Western world to overwhelm us," said Indian finance minister P. Chidambaram earlier today. The European Union's economic & monetary affairs commissioner says that "at least in Europe the fundamentals of our economies are sound."

The UK chancellor also thinks that the global financial slump remains solely a "subprime" US problem.

Alistair Darling told the BBC last night that the UK economy remains "sound [and] robust" thanks to low inflation (now rising at a 10-year record rate) and strong employment (11.3% of British adults wanting a job are now without work).

In Germany, however, it was Monday's announcement from WestLB in North Rhine-Westphalia – the country's strongest state economically – that it would post a loss of €1 billion for 2007 which helped push the blue-chip Dax more than 7.1% lower for the day.

"Just a few months ago," as Deutsche Welle reports this morning, "WestLB issued a statement assuring investors that its exposure to subprime securities in the United States was 'relatively limited'."

Now all eyes are on the Wall Street open. US markets stayed closed for a national holiday on Monday. Dow futures quoted in London today put the industrial index more than 590 points lower from Friday's finish.

Most urgently, traders will want to review the price of the big "monoline" insurers, those firms which insure the value of bonds held by pension, investment and hedge funds.

Between them, the monolines now stand behind $2,400 billion of corporate, municipal and asset-backed securities worldwide. And on Friday, a major monoline insurer – Ambac – saw its own credit-rating downgraded from "triple A" to "double A" after scrapping a plan to issue $1 billion in new shares to defend its balance sheet.

Down by 92% in the last six months, Ambac's stock lost only four cents on the news, but the fear today is that the credit rating agencies will downgrade its competitors – and without that critical "triple A" rating, they'll be unable to raise funds and guarantee payment on the bonds they have already insured.

In Frankfurt this morning the cost of insuring against bond-default by European companies shot to new record highs, with credit default swaps on investment-grade debt rising 8% in price.

High-yield bonds became 6.4% more expensive to insure using CDS.

Meantime in the commodities market, US crude oil today dropped nearly 3% to hit a six-week low of $84.64 per barrel. Brent crude traded in London for March delivery fell $2.50 to $85 per barrel.

Corn, copper and zinc all fell "limit down" at the Shanghai Futures Exchange, and palm oil futures in Malaysia suffered their worst one-day drop in seven months after the Beijing government said it will release key supplies from China's food stockpiles ahead of next month's Lunar New Year celebrations.

The cost of living rose by 6.9% in Nov., an 11-year record. Now state officials are "closely watching the supplies and prices of basic living necessities."

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

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