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Sunday, 5 October 2008

Outlook remains bleak

NEW YORK - THE United States government may have enacted a landmark US$700 billion (S$1 trillion) bank bailout, but jittery investors remain doubtful if it is able to contain a panic that began on Wall Street and spread to become a global financial crisis.

'This probably comes a bit too late. If this had been done earlier, it probably would have had a much bigger impact in restoring confidence,' said economist Anna Piretti, at BNP Paribas, of the plan passed by the US House of Representatives last Friday (early yesterday morning, Singapore time).

Stocks, which had been higher before the vote, dropped, with the S&P 500 index closing at its lowest level in almost four years. The Dow declined 157.47 points, or 1.5 per cent, to 10,325.38. The dollar was also in retreat.

Signs of a looming recession continue to spook investors,and analysts cautioned that it was still unclear whether the US bailout plan would work as advertised.

US Treasury Secretary Henry Paulson said he would move quickly to buy up distressed assets from banks. But Mr David Kelly, chief market strategist of JPMorgan Asset Management, said: 'There are more questions than answers out there still. Even if the banks do participate, how willing will they be to make new loans into the economy if they can get rid of the bad ones?'

In signs of the spreading crisis, the state of California said it was running out of money, France said the world stood on the 'edge of the abyss', and European leaders were split yesterday as they headed for a summit to seek a collective response to the banking sector's difficulties.

A collapse in the US housing market and resulting bad mortgages have shattered confidence in the financial sector, with banks across the US and Europe needing support from governments or outside investors.

Interbank lending and credit to businesses and private individuals have all but seized up.

A Labour Department report last Friday that the US economy lost 159,000 jobs last month added to the gloom. Some economists are predicting the US economy will contract in the months ahead. Those developments did not bode well for the corporate earnings that investors watch closely, creating a dour outlook.

'Investors still have to face some significant challenges in the broad economy that can't be magically removed by a group of our congressional leaders,' said Bessemer Trust's chief investment officer Marc Stern.

Analysts said it might take several days before the effect of the Bill's approval could be seen on the credit markets.

On Friday afternoon, the signals were mixed: High-yield bonds eased slightly but Treasury bills moved against expectations, becoming more expensive as investors remained nervous about emerging from the safety of government notes.

It was too soon to tell whether interest rates that banks charge one another for overnight loans - a crucial measure of the flow of credit to businesses and consumers - would fall.

Said market strategist Douglas Peta of the bailout plan: 'Credit is the lifeblood of the economy. Until the short-term funding markets start behaving regularly, and until banks are willing to play their role in the system, the direction in stocks is going to be down.'

New York Times, Reuters

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