Markets hit by Bank of England emergency loan to mystery bank
London shares jumped nervously from positive to negative territory today as traders tried to pinpoint the stocks at risk from a credit crunch.
The index jumped 40 points in opening deals and fell by as much as 40 points in morning trading. It was down 12.3 points, or 0.2 per cent, at 6,066.4 by mid-afternoon trading.
Amongst the worst performers were Cadbury Schweppes, off nearly 3 per cent following an earnings downgrade from Goldman Sachs which added its voice to the raft of brokers saying a sale of the drinks business was now at risk.
The Bank of England revealed that it had extended a £341 million emergency loan to an unnamed bank - the first time the facility has been used since mid July before the current credit market turmoil and attention turned to Northern Rock. Although Northern is said to have denied that it had borrowed the money.
The mortgage bank fell more than 2 per cent also following last night's statement that it had £275 million exposure to the US mortgage-backed collateralised debt market. Panmure Gordon questioned why a UK bank would have exposure to the US debt market at all.
Rumours circulated that it may have been another mortgage bank such as Alliance & Leicester or Bradford & Bingley that requested the loan, although both were off less than one per cent by early afternoon.
Persimmon, the housebuilder, was also a faller, off more than 1 per cent despite producing strong interim results.
Asian markets rallied overnight, building further on confidence brought about by Friday’s decision from the US Federal Reserve to cut its discount rate.
Japan’s Nikkei closed up 168.86 points, or 1.1 per cent, at 15,901.34 while the Hang Seng put on 133.72, or 0.6 per cent, to 21,729.35, having traded up nearly 3 per cent in midday trading.
Japanese stocks were bolstered by a weakening of the yen against major currencies, which drove expectations of a more positive trading environment for exporters.
The Dow Jones industrial average rose 42.2 points, or 0.3 per cent, to 13,121.3 last night, after the Fed on Friday reduced its discount rate - the rate at which it lends to banks - from 6.25 per cent to 5.75 per cent, in an emergency move.
American blue-chip shares suffered renewed volatility in choppy trading on Wall Street yesterday, denting hopes that last week's surprise intervention by the US Federal Reserve would snuff out upheavals in global markets.
In a symptom that turbulence is lingering in the markets, US Treasury bonds rose again as investors sought safe havens. Steep gains in three-month Treasury bills saw their yield slide to the lowest since late 2004.
The City was in an upbeat mood yesterday, as trading opened, amid optimism that the Fed’s move to cut rates for short-term lending to US banks would stem recent turmoil.
Christine Lagarde, the French Economy Minister, said: "I think the worst is behind us". Rodrigo de Rato, managing director of the International Monetary Fund, said: "As we understand, there will be some impact on growth but we still believe that prospects for the world economy are good.”
Separately, UBS, the Swiss investment bank, is reported to be considering job cuts in the wake of the heavy market fluctuations. Investor relations staff have, according to Thomson Financial, indicated to shareholders that it was considering headcount reductions. UBS denied the reports.
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