Asian Bourses Recover As Calm Returns To Financial Markets

Source : The Straits Times, Aug 14, 2007

Central banks in region refrain from cash injections, unlike in US, Europe and Japan

A MEASURE of calm and confidence returned to financial markets yesterday.
Asian stock markets made a tentative recovery from last week's rout, while central banks in the region outside Japan refrained from joining their United States and European counterparts in pumping additional cash into the system.

They maintained there was enough liquidity in their markets to avoid a credit crunch.

In Singapore, the Straits Times Index climbed 0.6 per cent to 3,380.61. Other key Asian bourses chalked up modest gains, with Tokyo's Nikkei 225 and Hong Kong's Hang Seng Index inching up 0.2 and 0.4 per cent, respectively.

In London, the FTSE 100 index also bounced back, closing almost 3 per cent higher at 6,219 points.

The European Central Bank (ECB) yesterday added emergency funds to the banking system for a third trading day, but said money markets were returning to normal.

Yesterday's injection of 47.7 billion euros (S$99 billion) followed a 95 billion euro infusion last Thursday and a further 61 billion euros on Friday.

The ECB noted that 'money market conditions are normalising and the supply of aggregate liquidity is ample'.

Across the Atlantic, the United States Federal Reserve yesterday pumped US$2 billion into the US financial system just after the stock market opened.

This followed the injection of some US$62 billion last Thursday and Friday to ease tightening credit linked to the crisis in the US subprime mortgage sector.

In a statement before the US markets opened yesterday, the Federal Reserve Bank of New York said that it 'stands ready to conduct additional operations later in the day as needed'.

Earlier in the day, Japan's central bank said it injected ¥600 billion (S$7.7 billion) into money markets, down from the ¥1 trillion it pumped in on Friday.

Central banks in South Korea, the Philippines, Singapore, Indonesia, India and Malaysia have said they are prepared to add cash into their systems if required.

But Malaysia's central bank chief, Ms Zeti Akhtar, said yesterday that while markets would remain fickle, Asia was stable amid high liquidity.

Elsewhere in Asia, policy makers insisted there was enough money in the banking system to warrant them staying out.

Yesterday's reassuring statements came after a week of panic in global markets over complex credit derivatives linked to defaulting US mortgages in its sub-prime - or high risk - sector.

The key fear among investors is there are still undisclosed losses resulting from bad debts that could trigger the collapse of some banks and funds. It is this concern that has led banks to hoard cash rather than lend it to each other in short-term trades as usual, making interbank lending expensive.

Money market traders also noted the close cooperation between the Bank of Japan, the US Fed and the ECB in pumping billions of dollars into a global financial market worried about a possible credit crunch.

Their actions have had an effect. The overnight rate at which banks lend euros to each other fell to 4.03 per cent yesterday from the six-year high of 4.62 per cent it hit on Thursday. There was also a sharp drop in the US Fed funds rate late on Friday.

While moves by central banks have raised concerns that the liquidity problem was more serious than previously anticipated, yesterday they helped ease tension and shift investor focus back to strong corporate and economic fundamentals.