Fears of deep recession set to hound markets

[Naveed Yaseen]

LONDON (October 27 2008): Investors anxiously awaited Monday's reopening of Asian markets after last week's dramatic world-wide slide in stock prices and currency collapses on increasing fears of a deep global recession.

-- More co-ordinated central bank action on the cards

-- Fed expected to cut rates sharply

-- US economy seen shrinking in third quarter

-- IMF, Ukraine agree in principle on loan package

While governments and central banks are expected to take further dramatic action to prop up the global financial system this week, there is concern it will not be enough to prevent companies from slashing production and jobs as sales get hit and financing remains difficult.

In the latest intervention by authorities, 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. Other such rescue moves are expected from the IMF over the next few days.

Central banks are likely to launch new co-ordinated emergency action this week to calm panic in financial markets. The US 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 US economic growth data due on Thursday is expected to show a 0.5 percent contraction in gross domestic product after a 2.8 percent growth the previous quarter.

"Increasingly, the signs point to a deep and synchronised 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."

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

PROTECTING 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.

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.

South Korea, whose markets and currency tumbled in the global financial storm last week, said it needed to take urgent action to prop up the economy. Some analysts said the central bank would cut interest rates on Monday.

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. Both the Qatar and Oman indices fell more than 8 percent, Dubai sank 5.53 percent and Saudi Arabia's index slipped 1.83 percent after an 8.7 percent slide on Saturday.

Governments have pledged about $4 trillion to support banks and restart money markets to try to stem the crisis and are considering tougher financial rules to guard against any repeat.

The IMF said the agreement with Ukraine would meet balance of payments needs created by the combined effects of the collapse of steel prices and the global credit markets turmoil.

Some other countries, including Hungary, Iceland, Belarus, and Serbia, have turned to the International Monetary Fund, for help to prop up their financial sectors.

The IMF is likely to finalise a deal this week with Iceland, where the financial system has all but collapsed. The international lender is also due to approve a plan to give those economies that qualify for a proposed new liquidity fund an unusually high level of funding.

VOLATILITY:

Officials in Russia said over the weekend its central bank had the means to control sharp fluctuations in its currency, but did not yet see the need to limit capital movements or change the ruble's trading corridor.

Foreign exchange analysts said extreme currency volatility, which included moves of 10 percent on some big rates on Friday alone, could see the Group of Seven or 20 top central banks intervening soon to stabilise world markets.

But other analysts say the moves are little more than an unwinding -- albeit a violent one -- of the excessive currency and investment imbalances built up over the last decade of historically low global interest rates.

The US dollar surged to two-year peaks versus a basket of currencies after dismal European economic data reinforced investor fears of a global recession.

The yen soared to multiyear highs versus the dollar and euro on the ensuing risk aversion, while at its low on Friday the British pound suffered its biggest one-day percentage drop against the US currency since 1992.

Market participants will also be preparing for new signs of weakness in corporate earnings and gloomy forecasts in what is going to be a heavy week of quarterly earnings reports.

US companies reporting earnings this week include United States Steel Corp, Procter & Gamble, Legg Mason, Kraft Foods, MetLife and Sun Microsystems. In Europe, reporting companies include Banco Santander, Alcatel-Lucent, France Telecom and Deutsche Bank.

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