Hong Kong: Asian share markets gave up most early gains on Wednesday on worries that more financial institutions may fall victim to the global credit crisis despite the US government’s last-minute rescue of American International Group Inc. (AIG).
Numbers tumble: Businessmen look at share prices in Tokyo. Japan’s Nikkei share average, which had closed at a three-year low the previous day, ended up 1.2% on Wednesday but was well off the day’s highs. Yuriko Nakao / Reuters
Oil rebounded more than $3 (Rs139), after two days of free fall, as the $85 billion AIG bailout soothed oil traders’ fears that the giant global insurer would go bankrupt, dealing a fresh blow to sputtering economic growth and fuel demand.
Investors in Asia selectively bought back equities while selling some of the low-risk government bonds and yen they had accumulated in the wake of Lehman Brothers Holdings Inc.’s bankruptcy filing on Monday.
However, indications of fear in financial markets remained elevated, the cost of insurance against defaults was soaring and evidence showed banks were hoarding US dollars, reflecting distrust rather than confidence.
Japan, Australia and India pumped $33 billion into money markets on Wednesday as the rescue of AIG failed to soothe frayed nerves and ease a funding squeeze triggered by the crisis.
The US Federal Reserve agreed to provide AIG, once the largest insurer in the world, a bridge loan of $85 billion and take an 80% stake in the ailing company to stave off a bankruptcy that would have thrown global financial markets into deeper turmoil.
But the move added to the burden on US taxpayers following the government takeover of mortgage firms Fannie Mae and Freddie Mac about a week ago.
The rescue was a surprise to some since the US government had allowed Lehman to fail only days ago.
“Rescuing AIG itself is a good thing, but we’re seeing a double-standard here. Why is the Fed helping AIG but not Lehman? Unless US authorities come up with a clear standard on who to help and who not to, market unrest will continue,” said Koichi Haji, chief economist with NLI Research Institute in Tokyo.
Japan’s Nikkei share average ended up 1.2% but was well off the day’s highs, after closing at a three-year low on Tuesday. Shares of Japan’s top bank Mitsubishi UFJ Financial Group finished up 1%.
The MSCI Asia-Pacific ex-Japan stocks index pared early gains and was down 0.05% by 3.30pm India time, after hitting a two-year low on Tuesday. It is down about 37% so far this year.
China’s main stock index fell nearly 3% to a new 22-month closing low, while in India’s Sensex closed about 2% down.
Hong Kong’s Hang Seng index ended 3.6% lower as investors remained wary of bank stocks. China’s top bank, Industrial and Commercial Bank of China, tumbled nearly 10% while global lender and Hong Kong market heavyweight HSBC Holdings Plc. fell 2.5%.
Most South-east Asian stock markets fell with Thai shares sliding 3.3% to its lowest in four years as investors worried about further political and financial sector instability.
The rescue of AIG was the latest event in one of the most tumultuous weeks in the history of finance that has changed the face of the US banking sector. Merrill Lynch and Co. agreed on Monday to be bought by Bank of America Corp. for $50 billion.
Investors knocked the MSCI All-Country World equities index to the lowest since December 2005 on Tuesday as a flight from anything resembling risk in markets reached a fever pitch. The driving fear was a bankruptcy by AIG would trigger a catastrophic chain reaction of defaults in the global credit market.
Shares of New York-based AIG have plunged 94% year-to-date.
“If AIG had gone belly up, you would have an unknown, humongous number of default swaps cut off. What would that lead to? We were already approaching some market disruption,” said Dan Fuss, vice-chairman of Loomis Sayles and Co. Lp. in Boston. “This (AIG rescue) is a huge relief to many parts of the financial markets,” Fuss added.
Investors unloaded government bonds after the AIG rescue and in the wake of the Federal Reserve’s decision overnight to keep interest rates on hold, spurning market expectations for a cut.
On Tuesday, two-year US treasury notes fell 8/32, driving yields up to 1.92%, from 1.79% late in New York. Yields on 10-year notes rose to 3.53%, from 3.44%. Commodity prices rallied, led by oil.
The last-minute rescue of AIG appeared to have neither ended the financial crisis, nor completely revived investors’ willingness to take risks.
The so-called TED spread of three-month US dollar borrowing rates used by large banks over the three-month US treasury bill yield has risen a full percentage point in the last week to the widest since the credit crisis began more than a year ago, as money markets effectively froze overnight. The spread is often viewed as an indication of how much of a premium market participants are demanding to take risks.
“People are scared of further financial institution difficulty. Funding remains difficult and flows of risk-sensitive capital have slowed considerably,” said Patrick Bennett, Asia foreign exchange and interest rates strategist at Societe Generale in Hong Kong.