Mumbai: US stocks fell sharply at the opening bell on Monday as the bankruptcy filing by US investment bank Lehman Brothers Holdings Inc. and cascading fears about the stability of other major financial institutions rattled global markets.
Soon after opening, the Dow Jones Industrial Average lost around 300 points to 11,120. At 8.45pm India time (11.15am in New York), it was trading at 11,193.44.
The US index’s fall mirrored the behaviour of indices in India and elsewhere in the world earlier Monday after a hectic weekend on Wall Street saw Bank of America Corp. agreeing to buy Merrill Lynch and Co. Inc. for $50 billion (Rs2.3 trillion on Monday) in stock late Sunday evening and Lehman saying early Monday morning that it would file for bankruptcy.
Manic Monday (Graphic)
Even as the Sensex, the Bombay Stock Exchange’s benchmark index, fell 5% shortly after opening, investors here recognized Monday as the day Wall Street’s landscape changed.
“It’s a crazy day,” said Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership Llp., a global fund manager registered as a foreign institutional investor (FII) in India. Alan Greenspan, former Federal Reserve chairman, said the US was in a “once-in-a-century” financial crisis.
Late Monday evening, shares of insurer American International Group Inc. (AIG) rose from its lows in early trading on speculation that billionaire Warren Buffett may be in talks with the company. AIG is struggling to raise capital to stave off a credit downgrade.
Meanwhile, Morgan Stanley and Goldman Sachs Group Inc. led a record surge in the cost of default protection on banks around the world. Credit-default swaps on Morgan Stanley soared 184 basis points to 448 and those on Goldman jumped 114 basis points to 313, according to CMA Datavision prices, late evening India time.
Credit-default swaps, or contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities, or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality. A basis point (one-hundredth of a percentage point) on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Through the day on Monday, central banks around the world pumped tens of billions of dollars into markets to limit the damage of developments on Wall Street.
In India, after the initial fall, the Sensex recovered around 2% towards evening, largely on account of some large investors chipping in to buy stocks from low levels, according to institutional brokers and analysts in Mumbai. The index closed down 3.35%, or 469.54 points, on Monday to end at 13,531.27.
At the National Stock Exchange, the broader 50-stock Nifty index fell 155.55 points, or 3.68%, to 4,072.90.
“Confidence has been shaken again,” said a foreign hedge fund manager with investments in Indian equities, asking not to be named. “Investors will now be waiting for incremental flow of information for the next many trade sessions.”
However, a contrarian and sanguine sentiment was also sweeping through Indian and global bourses.
The end of the crisis?
Some foreign fund managers say that if “most of the troubled firms in the US are either bailed out or taken over, it may also lead to the end of the current global credit crisis”. It is this logic that led some of these fund managers to buy stocks on Monday evening.
“What we are now witnessing is the cleansing of the system,” said one portfolio adviser in Mumbai, who helps some FIIs on their buying strategy. The adviser didn’t wish to be named.
Bank of America’s deal to take over Merrill Lynch and a US pledge not to bail out Lehman Brothers indicate financial markets are near the bottom, said Mark Mobius, executive chairman of Templeton Asset Management Ltd.
Analysts say follow-up announcements from Lehman Brothers and Bank of America, AIG’s restructuring plans that could be introduced on Monday night, or Tuesday morning India time, and the outcome of the Federal Reserve’s Tuesday meeting could move markets in the short term.
Things weren’t bleak for Indian markets, said some analysts. On Friday, India announced a better-than-expected industrial growth of 7.1% for July. And Brent crude oil for October settlement fell to $92.97 a barrel on the London ICE exchange.
Key Asian markets, including Hong Kong, Tokyo, Seoul and Shanghai, were closed on Monday.
“These markets are expected to slump when they open on Tuesday,” said a Hong Kong-based fund manager for a regional investment house, who did not want to be named.
Reuters, Bloomberg and AFP contributed to this story.