Lehman Storm Sparks Global Stock Markets Purge

Global stocks hammered after Lehman files for Chapter 11
* Investors flee risk; high-grade debt, gold, yen in demand
* Fed, ECB, BoE turn on liquidity taps
* Focus turns to Fed policy


(Updates throughout, adds quotes, update prices)

By Veronica Brown


LONDON, Sept 15 (Reuters) - Global share prices sank on Monday after Lehman Brothers filed for bankruptcy protection, prompting a sharp exit from risk across world financial markets.
The dollar lost traction against the yen, setting the Japanese unit on track for its best daily performance in nearly 2 years, but rallied against other major currencies as deleveraging kicked in.


Reflecting a growing sense of panic, futures markets jumped to price in a near 80-percent chance of a quarter-point cut in Federal Reserve interest rates at its meeting on Tuesday.
U.S. stock market futures fell by between 2.6 and 3.7 percent, pointing to a sharply lower open, while European stocks shed more than 4 percent. Among them, Lehman Brothers shares in Frankfurt tanked 90 percent.


Adding to worries was a report that American International Group Inc, one of the world's largest insurers, had asked the Fed for a $40 billion bridge loan, while the Fed itself said it had expanded its liquidity provision facilities.


European stocks followed their Asian counterparts down after share prices in Australia, Singapore and Taiwan all dropped 3 to 4 percent, while Indian stocks fell 5 percent.
The FTSEurofirst 300 index of top European shares was down 4.5 percent at 1,109.85 points.
Banking stocks led the fallers across Europe, with UBS, HSBC , Royal Bank of Scotland, Societe Generale, BNP Paribas and Credit Agricole trading 7-22 percent lower.


"This is a perfect storm in a perfect storm," said Justin Urquhart Stewart, investment director at 7 Investment Management. "It's a return to pure capitalism, the survival of the fittest -- government can't and won't bail everybody out."


Lehman filed for bankruptcy protection after trying to finance too many risky assets with too little capital, making it the largest and highest-profile casualty of the global credit crunch.
Also in the financial sector, Bank of America Corp agreed to buy Merrill Lynch in an all-stock transaction that Bank of America said is worth $50 billion.


TIDAL SWELL AGAINST RISK


Turmoil on Wall Street, just a week after the U.S. government bailed out mortgage giants Fannie Mae and Freddie Mac, sparked a wave of risk aversion through all asset classes.
The dollar tumbled more than 3 percent at one point versus the yen. Yen gains were later trimmed after China cut its benchmark interest rates and reserve requirements..
The U.S. currency rallied elsewhere, gaining more than 2 percent versus the high-yielding Australian and New Zealand dollars. It rose to the euro as investors unwound riskier currency plays and repatriated dollars.


"There is a high likelihood that the distress in financial markets and wider evidence of slowing global growth are prompting investors, particularly U.S. investors to repatriate those flows back into the U.S.," said Lee Hardman, currency economist at Bank of Tokyo Mitsubishi-UFJ.
A classic safe-haven, gold, initially jumped 2 percent before paring gains, while U.S. Treasury yields, which fall as prices rise, hit multi-month lows.


Growing unease pushed the cost of borrowing overnight dollar funds up.
The bank-to-bank premium paid for overnight dollar funds was fixed at 3.10625 percent, according to the British Bankers Association's latest daily fixing, up nearly a full percentage point at its highest since late June.


The price of insurance against default on debt soared, with the investment-grade Markit iTraxx Europe index at 124.5 basis points, 21.5 basis points wider than late on Friday.
The Swiss franc and yen, associated with stability in times of stress, strengthened. The dollar was last down roughly 2 percent to 105.87 yen and was down 0.6 percent at 1.1237 Swiss francs.
But the euro fell 0.6 pecent to stand roughly 3 cents down from session highs seen earlier, while sterling also shed 0.6 percent.


FED, ECB, BOE OFFER LIQUIDITY


The Fed said it would begin accepting equities as collateral for emergency loans for the first time -- a step likely to help surviving financial institutions find cash but which may not do much to boost global confidence in the U.S. financial system.


The European Central Bank and Bank of England both announced fine-tuning operations, signalling they were prepared to open the funding taps to try and ease money market tension.
In addition, 10 of the world's biggest banks agreed to establish a $70 billion borrowing facility to bolster liquidity.



Source:http://www.guardian.co.uk/business