Bear rescue spooks markets

Equity markets and the dollar sold off sharply on Monday, driving investors into the safe havens of gold and Treasury bonds, as the rescue of stricken investment bank Bear Stearns sparked fears of further financial sector strife.

The dollar tumbled to new lows against most currencies as markets increasingly priced in the likelihood of a 100-basis-points cut in the main Fed funds rate when the US central bank meets on Tuesday.

Shares in US banks opened significantly lower after JP Morgan Chase emerged over the weekend as the buyer of rival Bear Strearns for $2 a share.

The move came as the Fed announced it was cutting the discount rate at which it lends to banks by 25 basis points to 3.25 per cent, and opening up its discount window to 90 days from 30 days.

Bear Stearns shares opened 87 per cent lower at $3.70 as the S&P 500 shed 1.6 per cent at the open on Wall Street.Lehman Brothers slumped 25 per cent, while  Morgan Stanley lost 8.2 per cent and Citigroup fell 6.9 per cent.

In Europe banks were the heaviest falling stocks as investors worried about which financial institution would be the next to experience problems with creditors.

UBS , the Swiss bank fell, 10.6 per cent, while in the UK,  Royal Bank of Scotland and Barclays  both fell about 7 per cent. Alliance & Leicester,  a mortgage lender, slumped 10.5 per cent.

An announcement by the Bank of England that it was to inject an extra £5bn into distressed money markets did nothing to restore confidence, and the FTSE 100 in London fell 2.9 per cent to 5,469.3.

In Europe, the FTSE Eurofirst 300 plunged 3.8 per cent to 1,207.91, while Germany’s Xetra Dax fell 3.8 per cent to 6,205.41, and in France the CAC 40 dropped 3.2 per cent to 4,447.34.

In Tokyo,  the Nikkei 225 Average fell 3.7 per cent to 11,787.51 as banks and carmakers led the decline. Elsewhere in Asia, Hong Kong’s Hang Seng index lost 5.2 per cent and India’s Sensex index lost 5.1 per cent.

The dramatic intervention by the Federal Reserve to sponsor the rescue of Bear Stearns raised fears that there could be more victims in the financial services sector.

”Given that Bear has been rescued by selling it at such a huge discount, the market will assume its balance sheet was seriously and fundamentally impaired, and concerns could rise that other institutions might be in a similar predicament,” said Marco Annunziata, chief economist at UniCredit.

The dollar tumbled to new lows against most currencies. The euro moved to a new record at $1.5904, up 1.5 per cent from Friday’s close. The dollar fell 2.5 per cent against the Swiss franc to a record low of SFr0.9737 as the franc’s safe-haven appeal came to the fore. The Japanese yen rose to a new 12-year high against the US currency to Y95.77, up 3.2 per cent, with its low yield also acting as a buffer against risk.

By mid-afternoon, however, the dollar was off its lows and moved higher against sterling as investors feared problems in the UK’s own financial sector. The pound edged 0.7 per cent lower to $2.0031.

Records continued to fall in the commodities market as investors sought refuge from equity volatility in precious metals and oil.

Gold rose to a record $1,030.80 an ounce, before slipping back to $1,010 as the dollar recovered some poise. US crude oil rose to a new high of $111.80 a barrel before easing back to $107.42 on fears a recession could dent global demand.

The flight to safety ensured government bonds rose and forced yields sharply lower. The yield on the 10-year US Treasury fell 9.5 basis points to 3.37 per cent, while the two-year yield fell 13.8 basis points to 1.34 per cent.