Markets: Selling Wave Ends In New York, For Now

A sharp rally on Wall Street has halted the three day sell off around the world.

After markets in Asia and Europe once again finished in the red, the US market was down sharply until a media report in the last hour of trading changed the tenor of what had been another miserable day which saw the market re-enter bear territory by falling 20% or more from its most recent high.

The catalyst was a Financial Times report that European Union finance ministers are examining ways of coordinating recapitalisations of financial institutions.

The Dow jumped 153.41 points, or 1.4%, to close at 10,808.71 a turnaround of more than 400 points after slumping 251 points to the day's low.

The S&P 500 closed up 24.72 points, or 2.3%, at 1,123.95, after being down more than 1% at one stage, led by a rally in financial stocks including struggling banks like Morgan Stanley and Bank of America.

And the Nasdaq Composite added 68.99 points, or 3%, to 2,404.82 after also being down and ignoring the launch of the new version of the Apple iPhone.

The Financial Times said plan was discussed at Monday night's meeting of EU finance ministers that also postponed a decision on the next round of aid for the struggling Greek economy.

"Although the details of the plan are still under discussion, officials said EU ministers meeting in Luxembourg had concluded that they had not done enough to convince financial markets that Europe's banks could withstand the current debt crisis," the paper reported.

But the rally, which will boost trading in Asian shares today, will prove to be short-lived unless followed up quickly by some concrete proposals.

What it will mean is the commitment by EU countries and organisations to tens of billions of euros of new guarantees and capital injections (if needed).

The FT report came after Fed chairman, Ben Bernanke hinted in Washington that the US central bank might return to supporting US banks, as it did in the GFC.

That news helped steady wobbling US bank shares for a while, but they then resumed falling only to be helped by the FT report.

But 34 minutes or so after US markets closed at 7 am Australian eastern Summer Time, Moody's revealed a three grade cut to Italy's credit rating, a move that will rattle markets in Asia this morning and Europe tonight.

While not unexpected, the timing of the release was a shock after such a volatile day in markets in Europe and the US.

Moody's move follows the cut in Italy's rating announced by rival agency, Standard & Poor's on September 20.

Earlier yesterday Japan's Nikkei Stock Average lost 1.1%, while South Korea's Kospi plunged 5%, as investors caught up with some of Monday's losses after the three-day weekend.

Hong Kong's Hang Seng Index traded down 3.4% and Australia's S&P/ASX 200 index lost 0.6%.

European markets fell by between 1.5% and 3% with banks taking another pounding and the weakness in Dexia shares, which fell by more than a third at one stage, was halved that loss after the statement of support was issued by the two governments.

Gold fell more than $US54 an ounce in New York, oil was lower, as was copper. But all three bounced after the FT report appeared on the paper's website.

The Australian dollar fell well under 95 US cents in nervous trading overnight and was trading around 94.28 US cents before the FT report.

By the start of trading in Asia this morning, the dollar had bounced by more than 1.5 US cents to close to 96 US cents.

Overnight the pressure on European banks emerged as an issue for markets. Dexia Bank, a French-Belgian local government lender and retail bank was 'saved' by the two governments who committed themselves to supporting it restructure and overcome a liquidity freeze and sovereign debt problems.

The giant Deutsche Bank in Germany issued a profit warning based on the weak level of third quarter activity and higher write-downs on Greek and other sovereign debt.

That was after European finance ministers took a hardline approach on Greece:

Rather than accept the latest Greek budget and austerity measures (which miss deficit reduction targets and urge them to get closer in the next round of cuts), but hand over the 8 billion euros of loans, EU finance ministers refused to pay anything and sent the Greek home to cut deeper and come back on October 13.

A news conference broadcast on the internet in the early hours of Tuesday morning, European time, saw Jean-Claude Juncker, prime minister of Luxembourg and president of the Eurogroup of finance ministers, assure the world that no one wanted to see Greece collapse.

But that charitable statement didn't extend to giving Greece the money it wants. Not yet.

Juncker said no eurozone country at the meeting advocated that Greece default on its debt or that it be ejected from the euro.

But he said a decision on whether to pay Greece the next tranche of aid under a European bailout would be made after the Eurogroup received a report from auditors from the European Union, the European Central Bank and the International Monetary Fund (the so-called troika).

But it seems the Europeans are preparing to make a concession to allow Greece to receive the 8 billion euro sixth bailout payment.

Media reports said that would be achieved by combining the 2011 with 2012 budget targets instead (and ignoring the missed deficit targets for this year in particular).

But senior eurozone officials told the media that they were likely to extract new concessions for 2013 and 2014 in the coming days before signing off on the next payment.

The auditors are in Athens at the moment and are not expected to report back before today week, October 13.

The delay therefore means no decision on the 8 billion euros of loans for Greece is now expected before an EU summit on October 17-18 which had been expected to endorse the plans.

G20 leaders meet in Cannes, France on November 3-4 after a warm-up gathering of G20 finance ministers in Paris on October 14-15, right slap bang in the middle of the whole mess.

And Mr Juncker added that discussions on how to recapitalise Europe's troubled banks made good progress. That was the only hint at the talks in the meeting which the Financial Times elaborated on in a report later in the day.

That will be needed because Mr Juncker had bad news for private creditors: the 21% 'haircut' agreed to in the July agreement, looks certain to rise.

So European banks will need more capital and support. The most vulnerable is the French-Belgian bank, Dexia, which needs new billions of euros of new capital and to isolate nearly 21 billion euros of loans to Greece, Italy and other weak sovereign states in Europe.

The support guaranteed by the French and Belgian governments overnight helped steady a sagging sector in Europe and Bernanke's comments did the same in the US, but markets still fell.

In the US there are rising worries about Morgan Stanley's stability: the shares fell nearly 18% on Monday and last Friday. Other shares of US banks also fell.

And in Asia, watch South Korea where the country's banks depend heavily on offshore deposits and loans.

If a liquidity freeze develops in the region, South Korean banks will be the first to be chilled.