Markets Remain Edgy on Both Sides of the Atlantic

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Despite assurances from the U.S. Federal Reserve that measures are to be implemented immediately to make funds available to financial institutions, the U.S. stock markets took a battering for the second day in a row on Tuesday. The general outlook seems to be that whatever measures are taken at this stage, it may be “too little, too late”. The Dow Jones industrial average dropped 508 points, or 5.1 percent, to close at its lowest point since the end of September 2003, while the Standard & Poor’s 500 index fell 5.7 percent and the Nasdaq composite dropped 5.8 percent, to their lowest points since August 2003.

Remarks by Federal Reserve Chairman, Ben Bernanke, that the economic outlook had worsened and the financial crisis will negatively impact the economy well into 2009, served as a further blow to investor confidence. On a more positive note though, Bernanke expressed his belief that the Treasury Department and Federal Reserve intervention in the financial markets were carried out in time to prevent any permanent damage being done to leading financial institutions. He also indicated that the Fed may be considering interest rate cuts. Lower Fed fund rates have the effect of reducing borrowing costs for consumers and businesses on a wide range of loans, including credit card rates, home equity loans and business lines of credit, which in turn can stimulate economic activity. However, the downside of lower rates is that they could add to inflation pressures by reducing the value of the dollar and thereby making imported goods, including oil, more expensive. While the Fed’s next meeting is scheduled for 28-29 October, some analysts are anticipating an emergency Fed rate cut before then.

Meanwhile, markets across the Atlantic are also in turmoil. The British government revealed on Wednesday that it plans to use up to £50 billion in taxpayers’ money to part-nationalize the country’s eight major banks in what is being referred to as a “government-supported recapitalization scheme”. Additionally, a £200 billion credit line is being made available to banks, including the Royal Bank of Scotland, Barclays and HSBC, in an effort to restore stability.

Following a meeting of European Union finance ministers in Luxembourg on Tuesday, it was made known that the minimum guarantee on bank deposits applicable to all EU member states would be increased to €50,000. While some considered the figure to be rather low, French finance minister, Christine Lagarde, noted that it was set at that amount to enable smaller EU economies to comply. She also emphasized that that most important thing right now is that EU countries agree on an approach and be resolved to act in a “coordinated manner” in dealing with the current economic crisis.

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