Asian markets are staging a recovery today after a negative opening earlier this morning following confirmation of news that US Government will nationalise Citigroup and is looking at other distressed US institutions including Bank of America (BoA).
The Euro, Australian dollar, New Zealand dollar and most Asian currencies strengthened a little bit against the US dollar and almost all Asia-Pacific markets, including Singapore, rebounded just after 10 am Singapore time when the news was confirmed.
Most Asian markets were in positive territory at lunch time or had dramatically pared down losses.
US stock futures turned positive and Singapore’s benchmark Straits Times Index which had earlier in morning plunged to a new four-month low of 1,567 immediately rebounded 30 points to surge to 1,604.34 at lunch time. Hong Kong's Hang Seng Index was up 2.29% or at 12,990. Even Australia's ASX All Ordinaries which had opened down 2.5% had pared its losses to just 1%.
The US Government is set to announce later today that it will take 40% stake in Citigroup though Citi executives are still reportedly arguing with US Federal officials that US Government keep its stake in the bank to 25%. A substantial portion of US$45 billion that US government has injected into Citi over the past six months in form of preferential shares is likely to converted to ordinary shares of Citigroup.
There was no news however about the US government’s discussions with the executives of another distressed US bank, BoA, the largest financial services company in America. BoA took over the troubled investment banking giant Merrill Lynch late last year. The bank has said it does not need any more bailouts but a nationalisation is inevitable.
Analysts expect US Government will take a much smaller stake – probably around 25% in Bank of America. Analysts say several other large US banks will probably need similar bailouts or nationalisation including Wells Fargo which merged with distressed financial group Wachovia last year.
The nationalisation of US banks comes after the barometer Dow Jones Industrial Average broke through the November lows closing at 7,366 last Friday while the more widely followed S&P 500 Index barely floated above its record lows. The plan to nationalise US financial institutions follows similar moves in Europe and UK where banks like RBS and LLoyds have recently been nationalised.
Analysts expect this week to be a critical week for major US indices to hold above current levels. New US housing and employment data is due to be published this week as week as updated GDP data for the US which could show as much 5% decline October-December 2008 quarter.
The data is likely to surprise on the downside. If the major US indices hold above current levels analysts says other global markets will start to rebound but
US indices plunge further, global investors are more likely than not to take more off the table.
Singapore’s two sovereign wealth funds were early investors in distressed US financial assets. GIC has a substantial stake in Citigroup while Temasek Holdings, which invested in Merrill Lynch, is now biggest private investor in BoA.
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