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The United States economy is likely to face an extended slowdown, say two hedge fund experts.

Mr John Rowsell, chief executive of US-based Glenwood, noted that the credit crisis differs from previous market shocks, such as the bear market following the bursting of the dot.com bubble in 2000, because it is ‘more protracted’.

The question now is whether the downturn will be U-shaped or a more drawn-out L-shape, said Mr Rowsell, who is here to visit clients.

Singapore-based Timothy Peach, head of sales for Man Investments, a global alternative investments manager, agreed: ‘We could well be in an L-shaped recession.’

But he noted that the recovery may also take place sooner than in the case of Japan, as the US government has ‘taken action much more quickly - one year into the crisis’.

Japan took five years to act and the downturn lasted about a decade.

Man Investments owns Glenwood, which manages US$7.4 billion (S$10.6 billion) of assets in funds of hedge funds.

Mr Rowsell said he expects to see a ’stabilisation of risk in the market’ as excess leverage - which caused some of the problems - is removed from the system.

Leverage is likely to be ‘reduced dramatically’ at Goldman Sachs and Morgan Stanley after they lower their credit levels drastically - in line with regulations after converting from investment banks to commercial ones. But it will still take Washington’s US$700 billion bailout plan to restore stability, he said.

The volatile situation is not being helped by hedge funds reportedly grappling with an outflow of investor funds. Mr Rowsell noted that there is likely to be a ‘consolidation in the hedge fund industry’ as investors opt to put their funds with large funds that have stronger balance sheets, while smaller, marginal players will be forced to exit.

Responding to a question about Asian investors’ interest in Man Investments’ funds, Mr Peach noted that the group has continued to see a ‘high level of interest’, apart from the past month, when investors have been ‘frozen like rabbits in the headlights’.

High net worth individuals are now ‘prepared to pay a premium for capital protection’, so Man Investments has seen ’strong inflows’ into those products, he added.

Source : Straits Times - 2 Oct 2008

Historically, the US dollar has seen rebounds in the wake of a crisis. So the greenback is not expected to soften despite the lack of approval for a US$700 billion rescue package on Capitol Hill.

With the lack of viable alternative currencies, experts said the US dollar will remain supported despite short-term reactions in the market.

Thio Chin Loo, senior FX and IR strategist, Asia, BNP Paribas, said: “The US dollar has not rallied across the board. What we saw in the previous rounds of crises was the dollar making some ground particularly against the European currencies, against high yielding currencies, against emerging market currencies, including Asian currencies.

“This is because there’s been a repatriation of flows back into the US, and there’s been a flight to quality in buying US treasuries.”

Looking ahead, the greenback is expected to remain well supported. One reason for this is that Asian currencies have lost some of their lustre as the region begins to feel the effects of a global economic slowdown.

The Australian and New Zealand dollars are not quite the stalwarts they used to be.

Vishnu Varathan, regional economist, Forecast Singapore, said: “We will see some residual strength in the Aussie (dollar) due to the flight of funds to safe haven bets, gold being one of them. There has been some correlation between gold and the Aussie.

“The Kiwi was recently supported by an upside surprise in their GDP numbers, but overall story for the Kiwi and the Aussie have not changed, and we do expect that they will give up their gains against the dollar over a period of time.”

Observers also believe that should a rescue package eventually emerge, there is little chance of the inflow of funds creating an inflation risk. The slow pace of money movement caused by the credit crunch should keep a lid on any oversupply of the US dollar that may emerge. - CNA/vm

Source : Channel NewsAsia - 30 Sept 2008

WASHINGTON: US lawmakers overwhelmingly abandoned their president this morning by voting against his US$700 billion (S$1 trillion) bailout plan, sending US stocks into a precipitous tailspin.

The unexpected rejection of the plan in the US House of Representatives ravaged financial markets, sending the Dow Jones Industrial Average down as much as 705 points.

US crude oil sank more than US$10 to below US$97 a barrel, its single biggest fall in almost seven years.

Stocks plummeted on Wall Street even before the 228-205 vote to reject the Bill was announced on the House floor, as Congressmen ignored urgent pleas from President George W. Bush and bipartisan congressional leaders to quickly bail out the staggering US financial industry.

As at press time, the Dow was down more than 500 points at 10,611.

When the critical vote was tallied, too few members of the House were willing to support the unpopular measure with elections just five weeks away. Ample ‘no’ votes came from both the Democratic and Republican sides of the aisle but more Republicans than Democrats rejected the bailout.

A disappointed Mr Bush said he would meet his economic team to determine the next step to prevent a financial meltdown.

The vote had been preceded by unusually aggressive White House lobbying, and spokesman Tony Fratto said that Mr Bush had used a ‘call list’ of people he wanted to persuade to vote yes as late as just a short time before the ballot.

Earlier in the day, it was bad news and more bad news coming out of Europe.

European currencies fell while the US dollar, gold and government bonds surged as the Belgian, Dutch and Luxembourg governments rescued financial firm Fortis to prevent a domino-like spread of failure.

Hours later, the British government said lender Bradford & Bingley’s branch network would be sold to Spanish bank Santander and the remainder of the group would be nationalised.

Then, Iceland’s government bought a 75 per cent stake to take control of Glitnir after the bank’s funding position deteriorated in recent days, knocking the crown currency to record lows against the euro.

German lender Hypo Real Estate struck a last-minute deal with the government and a consortium of lenders to resolve a refinancing squeeze. Russia and Scandinavia also had to rescue their banks.

‘One sees now, that not only American but also European banks are affected and that the crisis is after all global,’ said Mr Carsten Klude, a strategist at MM Warburg.

The US banking system itself faced more upheaval. Its bank regulator announced last night that Citigroup will acquire the bulk of Wachovia, the country’s sixth-largest bank by assets.

This sent Wachovia shares plummeting more than 90 per cent, even as the regulator stressed that the bank ‘did not fail’.

Major central banks meanwhile tried to stem the growing credit crisis as commercial banks hoarded cash and refused to lend to one another for all but the shortest periods.

The US Federal Reserve and its counterparts in Canada, Europe and Asia pumped another US$630 billion into the lending system, flooding the banks with cash.

‘They are throwing billions around, but things seem to be getting worse, said Mr Joe Saluzzi, co-manager of trading firm Themis Trading. ‘There’s a monster amount of fear out there.’

Currency markets also felt the chills, with the euro falling more than 2 per cent to US$1.4301.

The British pound dropped more than 2 per cent to US$1.7962, heading for its steepest one-day loss since mid-1993.

Gold rose above the US$900 threshold, climbing 2.4 per cent to US$909.50 an ounce as investors fled to safety while oil fell more than US$6 a barrel to US$100 on fears of slowing economic growth.

Similar worries drove losses across stock markets in Asia earlier in the day as concern grew that the US bailout would fail to prevent the credit crisis from spreading.

REUTERS, BLOOMBERG, AGENCE FRANCE-PRESSE

Source : Straits Times - 30 Sept 2008

WASHINGTON, DC - The proposed massive bailout of Wall Street has been rejected by members of Congress amid dramatic scenes, after strong objections by the public to the US$700-billion ($1-trillion) rescue plan.

The White House and Congressional leaders, who reached a compromised agreement on the financial package on Sunday, were confident that the measure would pass.

But rank-and-file members of both the Republican and Democrat parties rebelled, after many received complaints from their constituents throughout the morning about the deal to use taxpayers’ funds to buy devalued assets of major Wall Street firms.

All 435 members of the lower House of Representatives face re-election on Nov 4.

A total of 132 out of 199 Republicans voted against their whips and against their President despite a morning appearance by Mr George W Bush urging them to approve the Bill for the good of the nation.

With just a simple majority needed to pass the Bill, 94 Democrats joined the rebellion, defeating the Bill by 228 to 205. Party whips attempted to twist arms, to no avail. The Bill will now have to be reintroduced at a later date.

The Bill was defeated by an unlikely alliance of conservative Republicans who viewed the Bill as “socialism” and left-wing Democrats who resented the fact that the Bill did not contain more provisions to help struggling homeowners.

The Dow Jones industrial index plummeted suddenly as news of the rejection hit Wall Street. The Dow had already dropped by about 300 points, and then fell a further 300 points in a matter of minutes, before recovering slightly. The Daily Telegraph

Source : Today - 30 Sept 2008

WASHINGTON hopes its sweeping bailout plan will get credit flowing again. But will it work on Wall Street? That is the US$700-billion ($1-trillion) question swirling around the biggest bailout in history. The first answer will come from the credit markets, where this crisis has unfolded for more than a year now.

Few economists see the rescue as a quick fix. Even if the frozen credit markets thaw a bit - and many analysts say they will - the good old days of easy money are over for now. The United States stock market, which has lost about 17 per cent this year, is bound to remain volatile. To many, a recession seems unavoidable.

The first big question, however, is whether some semblance of calm will return to the credit markets. If the plan works as hoped, market interest rates that have been stuck at unusually high levels should start to ease.

If that happens, banks and corporations would be able to borrow money at lower rates than they have in recent weeks, said Mr Mark Zandi, chief economist and founder of Moody’s Economy.com.

Since Lehman Brothers sank into bankruptcy, rates on short-term corporate borrowing have shot up. Investors have shunned all but the safest of investments, like US Treasury bills and notes. Last week, prices of two-year Treasury notes rose for a fifth straight week, a run that has reduced their yield by about a third of a percentage point.

“The most important thing is to see money markets normalise,” said Mr Zandi, who has advised the presidential campaign of Republican Senator John McCain. “If banks start lending to each other that would be a very positive sign and that would be key.”

Many borrowers are being penalised in the bond markets, if they can borrow money at all. Credit spreads - the premium investors demand to lend money to everybody but the federal government - need to fall, said Mr Jerry Webman, chief economist and senior investment officer for Oppenheimer Funds. Last week, in a rare reversal that occurs only in times of extreme stress in the credit markets, tax-free municipal bonds were yielding more than Treasuries, which are not tax exempt.

“Credit is man’s confidence in man,” Mr Webman said. “That confidence in the financial system needs to increase.”

Analysts said the market would be watching closely how the Treasury Department structured its planned purchases of troubled assets from financial firms. The government has suggested it might use auctions to establish prices for the securities and loans it plans to acquire.

Once investors have a better sense of what the troubled assets are worth, they will become more willing to invest in ailing financial firms that have not been able to raise capital because analysts fear they have not fully disclosed the quality of their assets.

Furthermore, once financial firms have raised more capital, a crucial test will be whether they plough that new money back into the market through loans and investments in businesses, said Mr Webman. If banks remain fearful and hoard cash instead, as they have done in recent months, the rescue effort will only have a modest impact on the economy and financial system.

But even if the government intervention is successful, economists and investors said it would not restore the days of easy credit that prevailed during the recent housing boom.

Furthermore, the rescue might not forestall a recession, said Mr David MacEwen, chief investment officer for the bond department at American Century Investments. Though he thinks the rescue efforts will help the economy, Mr MacEwen expects bankruptcies to spread, US home prices to fall and unemployment to rise.

“Having this plan contains the damage to some extent,” Mr MacEwen said. But, he added: “I think we are going to see slowing in economic activity. This is like steering a battleship, you make course adjustments but they take time to take effect.”

Source : Today - 30 Sept 2008