JEDDAH/NEW YORK: Global stocks soared yesterday in a massive relief rally after the US government bailed out ailing mortgage giants Fannie Mae and Freddie Mac, easing fears of a global financial meltdown. The Saudi stock market also reacted positively yesterday.
US Treasury Secretary Henry Paulson said Sunday the government stepped in because the potential damage to the economy and financial system from their failure was too serious to safely ignore.
Under the takeover plan, the Treasury took $1 billion in preferred senior stock in each company, but its equity stake could reach as much as $100 billion in each and would be senior to both existing preferred and common shares.
US President George W. Bush said the action had been necessary because troubles at Fannie Mae and Freddie Mac, which have $1.6 trillion in debt outstanding, posed “an unacceptable risk to the broader financial system and our economy.”
John Sfakianakis, chief economist at SABB (The Saudi British Bank), said, “Action by the US government removes the uncertainty about Fannie and Freddie and the bailout that was largely anticipated. Although the intervention offers a structural relief this doesn’t eliminate the crises the US economy is facing. The economy is slowing down, unemployment is rising and consumer confidence and spending is faltering. We have some way to go with the financial crisis and the housing slump. The positive reactions of stock markets might not necessarily last and might revert to their usual anemic behavior.”
Echoing Sfakianakis remarks, Howard Handy, general manager and chief economist of Samba Financial Group, said, “This move had become inevitable for the US authorities and it is not surprising that it has been well received by the markets. But one should not lose sight of the big picture. The US financial markets remain under stress and the economy is likely to weaken significantly in the second half: We are not yet out of the woods.”
In London, the FTSE 100 blue chip index jumped 3.92 percent to 5,446.30 points despite technical problems that prevented trade for much of the day.
In Paris, the CAC-40 index was up 3.42 percent at 4,340.18 points and in Frankfurt the DAX jumped 2.22 percent to 6,263.74 points.
The Euro Stoxx 50 index of leading euro zone companies was up 3.09 percent.
Elsewhere in Europe, the Bel-20 index in Brussels rose 4.40 percent, the Ibex-35 in Madrid added 3.72 percent, Italy’s Mib-30 was 2.90 percent higher, the AEX 25 in Amsterdam put on 2.46 percent and Switzerland’s SMI 20 gained 2.88 percent.
In New York, the Dow Jones Industrial Average jumped 213.49 points (1.90 percent) to 11,434.45 around 1511 GMT and the tech-heavy Nasdaq composite rose 9.77 points (0.43 percent) to 2,265.65.
The broad-market Standard & Poor’s 500 index advanced 19.79 points (1.59 percent) to 1,262.10.
Shares in Fannie Mae and Freddie Mac, which have lost about 90 percent of their value so far this year, plunged again. Fannie Mae at $1.30 and Freddie Mac at $1.28 were each down more than 80 percent from Friday.
The dollar jumped to an 11-month high against the euro yesterday in volatile trading on the US news. The single European currency fell at one point in late-day deals in London to 1.4118 dollars, its lowest reading since October 10. It later traded at 1.4121 dollars against 1.4260 dollars late Friday in New York. The dollar also gained against the yen, rising to 107.95 yen from 107.65 on Friday.
In London trading yesterday, the euro changed hands at 1.4121 dollars against 1.4260 late on Friday, at 152.52 yen (153.57), 0.8055 pounds (0.8075) and 1.5976 Swiss francs (1.5955). The dollar stood at 107.95 yen (107.67) and 1.1304 Swiss francs (1.1186).
On the London Bullion Market, the price of gold fell to $808 per ounce at the fixing from $808.50 late on Friday.
In Saudi Arabia, the Tadawul All-Share Index (TASI) jumped 337.7 points or 4.27 percent to close at 8,245.21, ending higher for the first time in five sessions.
However, oil fell yesterday as part of a broad selloff in the commodities markets.
US crude futures fell $1.27 to $104.96 a barrel by 1630 GMT after dipping as low as $104.70 — the lowest since early April — adding to heavy losses since mid-July’s peak over $147 on weaker energy demand from the United States and other developed economies.
London’s Brent crude futures fell $1.55 to $102.54 a barrel at 1355 GMT.
— With input from agencies