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Central bankers’ liquidity plan fails to impress Asian investors

China and HK biggest losers in Asia; STI down 2%

(SINGAPORE) Investors in Asian stock markets, clearly sceptical that a plan by central banks to inject liquidity into the system to ease sub-prime pressure would work, yesterday braced themselves for an expected Wall Street sell-off by first dumping stocks throughout the region.

The losses were greatest in China and Hong Kong, where the major indices lost 2.5-3.7 per cent, while here, the Straits Times Index caved in by 69.94 points or 2 per cent to 3,479.31.

However, the STI had already risen 300 points or 8.5 per cent in little under the previous three weeks in anticipation of a US interest rate cut and/or bailout packages.

Similarly, although Hong Kong’s Hang Seng Index yesterday plunged 777 points or 2.7 per cent to 27,744.45, it had surged almost 3,300 points or 13 per cent over the same period.

Dealers said investors, who on Wednesday had apparently embraced news that the Fed is to join hands with other central banks in injecting money into the system by pushing Wall Street higher, had seemingly suffered a change of heart – the December futures contract on the Dow Jones Industrial Average yesterday suffered a loss during Asian trading, suggesting a weak session on Thursday.

‘Just like interest rate cuts, they’ve done it before and it hasn’t helped,’ said a dealer. ‘So markets are understandably cautious and sceptical.’

The New York Fed injected US$62 billion into the US banking system on Aug 9 and 10 in order to ease the credit market’s problems and followed this up with a discount rate cut a week later, but after initially rallying in response, stock markets have continued to suffer from a series of sub-prime related blows.

The suggestion was also made that the pressure of the past two days was due to disappointment over Tuesday’s 25 basis points cut in short-term US interest rates since 50 might have signalled greater Fed resolve to aid the credit market and stave off a recession.

An increasing number of economic commentators have been highlighting the increased likelihood of a US recession, most prominently Morgan Stanley.

In an Asia-Pacific Economics report released yesterday, it said the risk of credit problems attacking the heart of US growth, that is, household consumption, has increased significantly.

‘We believe that Asia ex-Japan (AXJ) will face the real test during the first quarter of 2008 as the US dips into recession,’ said Morgan Stanley.

‘We believe that the market may first be surprised on the downside as the growth trend slows in AXJ in 2008 before it builds the conviction for soft decoupling.’

The US bank also warned of potential turbulence in US equities. ‘In the past few years, globalisation of financial markets has meant that we cannot ignore the possible transmission of growth shocks through financial market linkages . . . during 2000-6, the average correlation between MSCI Asia-Pacific ex-Japan and MSCI US was 72.6 per cent,’ it said.

 

Source: Business Times 14 Dec 07

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