Nervous investors sold equities and shifted to the perceived safety of government bonds and gold on Tuesday as Tim Geithner, US Treasury secretary, unveiled re-vamped plans to stabilise the banking system.
Mr Geithner said a public-private fund would be established to buy an initial $500bn of distressed assets from banks’ balance sheets, while up to $1,000bn would be committed to a Federal Reserve lending programme.
Analysts said the negative market response to the plan was due to a lack of detail.
“What stands out from Mr Geithner’s speech is that a lot of uncertainty remains with respect to the public-private fund,” said Philip Marey, at Rabobank.
Martin Slaney, head of derivatives at GFT Markets, said: “The plan had been hyped up to potentially be the magic bullet and to draw a line underneath the toxic assets quandary – which was probably unrealistic – but those hopes have now been dashed.
“Ultimately, the perennial question of how to value banks’ toxic assets remains unanswered and that is how the markets are judging this plan: incomplete.”
US and European equity markets came under heavy pressure, and the S&P 500 closed down 4.9 per cent, near its low for the day. The financial sub-index fell 11 per cent.
The sell-off on Wall Street sent European markets spiralling lower, and the FTSE Eurofirst 300 index fell 2.9 per cent.
Asian markets saw nervous trading ahead of Mr Geithner’s announcement. In Tokyo, the Nikkei 225 Average slipped 0.3 per cent, Australian stocks shed 0.6 per cent and Seoul lost 0.3 per cent.
But Chinese stocks put in a strong performance as soft inflation figures raised the prospect of further interest rate cuts. The Shanghai composite index rose 1.8 per cent to a four-month high, while Hong Kong extended its winning run to five sessions as it gained 0.8 per cent.
Tammo Greetfeld, equity strategist at UniCredit, said he felt equity markets would continue the stabilisation phase that began in October.
“Earnings estimates for corporates will continue to fall,” he said. “But in the current phase, the key to a positive equity market performance is a recovery by the leading indicators in the coming months. The latest signs are encouraging.”
Longer-dated US government bond yields retreated from Monday’s 2½-month highs as supply concerns were put to one side in the face of safe-haven buying. The Treasury’s record $67bn debt refunding began on Tuesday with the well received auction of $32bn of three-year paper.
The yield on the 10-year Treasury, which climbed back above 3 per cent on Monday for the first time since November, fell 19 basis points to 2.83 per cent, while the 30-year yield was 18bp lower at 3.52 per cent.
European bonds got an additional push higher as gloomy figures on French and Italian industrial production for December added to expectations that the European Central Bank might cut interest rates aggressively next month. The 10-year Bund yield fell 7 basis points to 3.34 per cent.
“The latest eurozone industrial production data confirm that the sector is in dire straits and is pushing the region into a very deep recession,” said Ben May, at Capital Economics.
Even grimmer news came from Sweden as industrial production plunged by 5.1 per cent in December, triggering talk that the Riksbank might cut interest rates more aggressively than had been expected and pushing the krone lower.
Elsewhere on the currency markets, the euro spent much of the day trading lower against the dollar as concerns about the eurozone’s exposure to emerging Europe were heightened by a report that Russia might be looking to restructure $400bn of outstanding corporate debt.
The report was denied by the head of the Russian Association of Regional Banks, although the euro dropped as low as $1.2811 before recovering.
In commodities, gold climbed back above $900 an ounce on flight-to-quality buying.
Oil prices saw choppy trading as investors digested the US bank rescue plan. The US benchmark March WTI contract climbed to within a whisker of $42 a barrel only to slide back below $38, down $2.01 on the day. Base metals were also pressed lower.