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Markets rebound after AIG rescue

Latest update : 2008-09-17

Stock markets in Asia and Europe bounced back after the US Federal Reserve announced an 85 billion dollar loan to rescue embattled insurance giant AIG, and British bank Barclays agreed to buy parts of Lehman Brothers, which went bankrupt Monday.

Also read: ECB injects 70 billion euros into money market

and: Global credit crunch spells uncertainty for Airbus

Watch our programme 'Top Story' on the Wall Street meltdown

HONG KONG, Sept 17 (Reuters) - Asian stocks rose and oil jumped more than $3 on Wednesday after the U.S. government bailed out cash-strapped American International Group in a dramatic about-face to stem further damage to the global financial system.

But gains were cautious in many markets amid fears that the global credit crisis, now in its second year, could claim more victims and choke economic growth.

Major European stock markets were expected to open up as much as 2.1 percent in a relief rally after a heavy battering in recent sessions.

Investors selectively bought back equities while selling some of the low-risk government bonds and yen they had accumulated in the wake of Lehman Brothers' bankruptcy filing on Monday.

However, indications of fear in financial markets remained elevated, the cost of insurance against defaults was soaring and evidence showed banks were hoarding U.S. dollars, reflecting distrust rather than confidence.

The U.S. Federal Reserve agreed to provide AIG, once the largest insurer in the world, a bridge loan of $85 billion and take an 80 percent stake in the ailing company to stave off a bankrupcty that would have thrown global financial markets into deeper turmoil.

But the move added to the burden on U.S. taxpayers following the government takeover of mortgage firms Fannie Mae and Freddie Mac about a week ago.

The rescue was a surprise to some since the U.S. government had allowed Lehman to fail only days ago, suggesting how unstable markets have forced consumers, investors and policymakers alike to be more flexible.

"Rescuing AIG itself is a good thing, but we're seeing a double-standard here. Why is the Fed helping AIG but not Lehman? Unless U.S. authorities come up with a clear standard on who to help and who not to, market unrest will continue," said Koichi Haji, chief economist with NLI Research Institute in Tokyo.

Japan's Nikkei share average rose 1.2 percent but was well off the day's highs, after closing at a three-year low on Tuesday. Shares of Japan's top bank Mitsubishi UFJ Financial Group finished up 1 percent.

The MSCI Asia-Pacific ex-Japan stocks index pared early gains and was up 0.8 percent at 0600 GMT, after hitting a two-year low on Tuesday. It is down 37 percent so far this year.

Hong Kong's Hang Seng index fell 1.85 percent as investors remained wary of bank stocks. Shares of China Construction Bank, China's second-largest bank, was the biggest drag on the index, slumping 8 percent, followed by HSBC, Europe's largest lender.

The rescue of AIG was the latest event in one of the most tumultuous weeks in the history of finance that has changed the face of the U.S. banking sector. Merrill Lynch agreed on Monday to be bought by Bank of America for $50 billion.

Fear remains

Investors knocked the MSCI All-Country World equities index to the lowest since December 2005 on Tuesday as a flight from anything resembling risk in markets reached a fever pitch. The driving fear was a bankruptcy by AIG would trigger a catastrophic chain reaction of defaults in the global credit market.

AIG shares have plunged 94 percent year-to-date.

"If AIG had gone belly up, you would have an unknown, humongous number of default swaps cut off. What would that lead to? We were already approaching some market disruption," said Dan Fuss, vice chairman of Loomis Sayles in Boston. "This is a huge relief to many parts of the financial markets."

Buoyed by the AIG rescue news, the U.S. dollar rose 0.8 percent against the yen to 106.11 yen after sinking to a four-month low of 103.54 yen on Tuesday.

The euro was up 0.5 percent at $1.4190, boosted mainly by the 15-nation currency's 1.3 percent recovery against the yen to 150.77 yen

Investors unloaded government bonds after the AIG rescue and in the wake of the Federal Reserve's decision overnight to keep interest rates on hold, spurning market expectations for a cut.

Two-year U.S. Treasury notes fell 8/32 in price, driving yields up to 1.92 percent, from 1.79 percent late in New York on Tuesday. Yields on 10-year notes rose to 3.53 percent, from 3.44 percent.

Commodity prices rallied, led by oil. November U.S. light crude futures rose $3.34 to $94.49 a barrel after hitting a seven-month low on Tuesday, supported partly by supply disruptions after Hurricane Ike crashed into the Gulf of Mexico.

The last-minute government rescue of AIG appeared to have neither ended the financial crisis, nor completely revived investors' willingness to take risks.

The so-called TED spread of 3-month U.S. dollar borrowing rates used by large banks over the 3-month U.S. Treasury bill yield has risen a full percentage point in the last week to the widest since the credit crisis began more than a year ago, as money markets effectively froze overnight.

The spread is often viewed as an indication of how much of a premium market participants are demanding to take risks.

"People are scared of further financial institution difficulty. Funding remains difficult and flows of risk-sensitive capital have slowed considerably," said Patrick Bennett, Asia foreign exchange and interest rates strategist with Societe Generale in Hong Kong.

Date created : 2008-09-17