- Not for the faint of heart. U.S. stock indices plunged more than 8% intraday in a whirlwind session that saw them close down a milder 3-4%. At its low, the Dow was down 10% from Friday at about 2:00 PM, not long after the government's $700B bailout became law. Investors continue to worry about whether the bailout will succeed in thawing frozen credit markets - the lifeblood of U.S. business. Global markets fared no better: Asian markets fell to multiyear lows while European averages saw their worst percentage drop in 20 years. In Russia, trading was halted after its index plummeted 19.1%.
- Quietly, Fed drops rates. Using its new-found power to pay interest on bank reserves, the Fed effectively lowered the overnight lending rate by 0.75% to 1.25%. At the same time, it doubled the cash funding its short-term bank-lending facility to $900B. Economists said the 0.75% spread came as a surprise. The Fed says it will adjust the target vs. effective spread "based on experience and in response to evolving market conditions."
- Fed may foray into unsecured debt. In an effort to address tensions in the commercial paper market, the Fed is considering making an unprecedented move into unsecured lending, WSJ reports. When the Fed rolled out measures to loosen up the asset-backed commercial paper (ABCP) market in September, some debt brokers complained the move could kill demand for the unsecured paper relied on by foreign banks and companies. Yesterday, Pimco's Bill Gross called on the Fed to start buying commercial paper, coupled with a drop in its target rate to just 1%.
- BofA coughs up dismal Q3. Shares of Bank of America (NYSE:BAC) fell 10% in extended trading Monday after it preannounced weaker-than-expected earnings, halved its dividend to $0.32, and initiated a common stock issue of at least $10B. "The recession is going to be a little deeper than we thought," CEO Ken Lewis said on a conference call. "It's going to take some more time and some more pain." Profit fell 68% to $1.18B. EPS of $0.15 was a mere quarter of the $0.61 analyst consensus. "We don't look real smart today, given what's happened," Lewis said, "But all in all we just thought it was prudent to get out there sooner rather than later."
- Future uncertain for U.K. banks. With an eye to replenishing depleted capital from mortgage-related losses, the U.K. government may invest as much as $79B in its banking system, as the U.K.'s three biggest banks - Barclays (NYSE:BCS), Royal Bank of Scotland (NYSE:RBS) and Lloyds TSB (NYSE:LYG) - say they will each need up to $26B of government money to strengthen their balance sheets. Barclays categorically denies it requested funds. The U.K. government is also considering a plan to partially nationalize banks on a voluntary basis, but says at this stage it is a contingency plan only. Share of the trio plunged in overseas trading: RBS -34.5%. LYG -18.5%. BCS -13.3%.
- Abu Dhabi resuscitates AMD with $8.4B. Shares of Intel (NASDAQ:INTC) rival Advanced Micro Devices (NASDAQ:AMD) are up 9.7% premarket after it announced an $8.4B investment from the Abu Dhabi government along with plans to spin off its manufacturing plants. Abu Dhabi will pay AMD $700M for a stake in a new company which will own two AMD German plants and build another in New York. The spinoff will assume $1.2B of AMD's debt. It will receive up to $6B from Abu Dhabi for factory expansion and another $1.4B in operating capital. Abu Dhabi is also spending $314M to double its stake in AMD to 19%. The move is likely to calm investors, who feared the chipmaker was on the brink of bankruptcy.
- Wells Fargo, Citi put gloves down. Wells Fargo (NYSE:WFC), Citigroup (NYSE:C) and their joint takeover target Wachovia (NASDAQ:WB) agreed to a two-day standstill in their legal dispute - setting the stage for a potential settlement. FDIC chief Sheila Blair said the Fed moved to broker the truce after realizing legal wranglings could derail the process; she says the banks and regulators are now working together to find a mutually-beneficial solution.
- EU lacks unity on crisis response. Continued discussions amongst EU leaders failed to produce an agreement on how best to respond to the financial crisis gripping the Eurozone. France and Italy's suggestion of a U.S.-style bailout fund received little support, and yesterday's meeting of EU finance ministers culminated in nothing more than a reiteration by national leaders of the need to protect bank deposits. An EU commissioner called for "a clear, coordinated, European approach," as Germany's Merkel stressed "each member country must tackle its own problems." Across Europe, countries continued to act unilaterally to prop up struggling domestic banks.
- Asia-Pacific tries for credit thaw. The central banks of Japan and Australia injected over $11B into money markets to loosen up credit. Bank of Japan added $9.8B to the market as the three-month interbank rate stayed at 0.87%, the highest this year. The Reserve Bank of Australia added $1.3B, and lowered its borrowing rate by 1%, twice as much as economists expected. Short-term interbank lending rates have continued to rise despite previous capital injections, and recent stock market drops have contributed to over $2T in lost value since the credit crisis began. Economist Adam Carr, describing the state of financial markets, said "we've been living in a dreamland and that dream has ended."
- Hard to find funds. Overnight Libor - the rate banks charge each other - soared 157 basis points to 3.94. The corresponding rate for euros, Euribor, climbed 22 BPs to 4.27%. "There's still a massive lack of confidence in this market and the more we talk about it, the more it becomes a self- fulfilling prophecy," money-market trader Jan Misch said. The seizure in global credit markets is deepening as investors worry attempts to revive lending between financial institutions won't work, resulting in more bank failures.
- MUFG to offer U.S. I-banking. U.S. regulators granted Mitsubishi UFJ (NYSE:MTU) the status of a financial holding company. This will allow Japan's largest bank to offer full investment banking services and equity underwriting in the U.S. The move is part of Mitsubishi UFJ's plan to expand its presence in the U.S. and to position itself to take advantage of future consolidations in the U.S. banking market.
- Short-term softness, 2009 turnaround, NABE says. "Business economists have become more negative on the economic outlook for the next several quarters as a result of the tightness in credit markets and weakness in consumer spending, expecting growth to stall in the fourth quarter," NABE said Monday in its Outlook. "If financial conditions fail to improve quickly, near-term economic prospects could deteriorate markedly. Still, the NABE panel expects that lower oil prices, a bottoming out in home prices, and a better functioning of financial markets should enable the economy to resume trend-like growth by the second half of 2009." Two out of three economists believe we're already in recession, or will be there before year end. It says deteriorating near-term growth prospects should to lead to more job losses and higher unemployment.
Earnings: Tuesday Before Open
- F5 Networks (NASDAQ:FFIV): Sees FQ4 revenue of $171.3M vs. $173.2M consensus due to a sharp slowdown in Europe. [PR]
- Asia drifted lower Tuesday. Nikkei -3.03% to 10,156. Shanghai -0.73% to 2,158. BSE Sensex -0.58% to 11,733. Hang Seng closed.
- Shaking off initial jitters, Europe is higher at midday. London +0.9%. Paris +1.6%. Frankfurt +1.3%.
- Overnight futures trading has been extremely volatile. Stock futures climbed, then plunged, then climbed again. Dow +0.74% to 10,038. S&P +1.09%. Nasdaq +1.21%.
- Crude +3.26% to $90.73. Gold +2.25% to $885.70.
Tuesday's Economic Calendar
7:45 ICSC Retail Store Sales
11:00 Fed's Gary Stern speaks on repercussions of the financial shock
12:30 PM Fed's Bernanke speaks at NABE conference
2:00 PM FOMC Minutes
3:00 PM Consumer Credit
5:00 PM ABC Consumer Confidence Index
- Notable earnings before Tuesday's open: SWY
- Notable earnings after Tuesday's close: YUM
Seeking Alpha editor Rachael Granby contributed to this post.
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