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23 April 2024

G7 does little to calm market fears

By Agencies

Currency and stock markets are likely to remain skittish this week after a Group of Seven meeting at the weekend offered no quick fix for the turbulence in credit markets.


The G7's message on currencies was much the same as at previous meetings and was expected to have little impact. The communique encouraged China to allow the yuan to appreciate more quickly.


The finance leaders from the world's top industrialised nations also urged banks to fully disclose losses and shore up balance sheets to help restore the normal functioning of markets.


Analysts said such words by themselves were unlikely to dispel worries over financial institutions' losses from the turmoil in credit markets, which flared up last year due to rising defaults on US subprime mortgages.


"The G7's joint statement contained nothing eye-catching and there were no surprises. It will probably be hard for equity markets to show an immediate positive reaction," said Tsuyoshi Segawa, an equity strategist for Shinko Securities.


Since investors did not have very high expectations of the G7 meeting to begin with, there was unlikely to be any sharp, knee-jerk reaction in either equities or currency markets.


But risk appetite was likely to remain subdued, and as a result the yen could rise towards three-year highs against the dollar in the weeks ahead, analysts said.


"The risks of further rises in the yen are high," said Masafumi Yamamoto, head of foreign exchange strategy for Japan at the Royal Bank of Scotland.


The yen tends at the moment to take its cue from equity markets, seen as a barometer of investors' appetite for risky carry trades that consist of selling low-yielding currencies such as the yen to invest in higher-yielding currencies and assets.


Falls in equities tend to temper demand for such carry trades and lend support to the yen.


Yamamoto said the yen could rise to 104 to the dollar by the end of March, which would be its highest level since March 2005.


The dollar stood at around 107.35 yen at the end of last week, having recovered from 104.95 yen in January, which was the dollar's lowest level in nearly three years.


Equity markets had a dismal time last week, with the US Dow Jones industrial average falling 4.4 per cent, its worst week in about five years. The FTSEurofirst 300 index of top European shares fell 3.7 per cent and Tokyo's Nikkei average 3.6 per cent.

Financial markets in China and Taiwan will be closed on Monday for Lunar New Year holidays. Markets in Japan will also be closed for a national holiday.


Credit market woes


The G7 said the crumbling US housing market had wounded the world economy and that conditions could worsen as debt-laden banks clamp down on credit.


Mario Draghi, Bank of Italy governor and a European Central Bank Governing Council member, said on Saturday that the next 10 days to two weeks would be crucial as more banks detail their exposure to bad debts.


Banks have already taken more than $100 billion (Dh365 billion) in write-downs to clean up their balance sheets. German Finance Minister Peer Steinbrueck said on Saturday that write-offs could reach $400 billion (Dh1.46 trillion).


Further write-downs by banks and possible capital injections may be announced alongside European bank results this month.


"The focus will be on individual steps such as any plans to bolster capital to resolve concerns about the financial system," said Toru Tanaka, senior manager for treasury and foreign exchange at Mitsubishi Corporation.


"Currency markets are likely to move this way and that depending on such individual pieces of news," Tanaka said.


Investors remain uneasy about the outlook for US bond insurers, referred to as monolines, after Moody's Investors Services cut its "AAA" ratings for bond insurer XL Capital Assurance, a unit of Security Capital Assurance on Thursday.

Investors are waiting to see whether Moody's and Standard & Poor's will downgrade the two largest bond insurers, MBIA Inc's, MBIA Insurance Corp and Ambac Financial group's Ambac Assurance Corp.


Any such downgrades would have an impact on the securities they insure and could cause deeper financial losses, unsettling the financial system anew and hitting fragile stocks.


Other factors that investors will focus on in the coming week include data on US retail sales on Wednesday and US Federal Reserve Chairman Ben Bernanke's testimony before the Senate Banking Committee on Thursday.


The Bank of Japan is expected to keep interest rates unchanged at 0.50 per cent at a two-day meeting that ends on Friday. (Reuters)