More than $25 trillion has been erased from global equities in 2008 - Bloomberg

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More than $25 trillion has been erased from global equities in 2008. Central banks from London and Frankfurt to Washington and Hong Kong this week were forced to cut interest rates after the yearlong credit-market seizure stoked concern banks will run short of money.

Global Stocks Tumble, Driving S&P 500 to Worst Week on Record

By Sarah Thompson

Oct. 10 (Bloomberg) -- Stocks tumbled around the world, driving the Standard & Poor's 500 Index to its worst week on record, and commodities slumped amid growing concern international attempts to prop up financial markets will fail to avert a recession.

The S&P 500 fell 7 percent to the lowest level since the start of the Iraq War in 2003 while stocks in Europe and Japan staged the steepest weekly tumble in at least 21 years. Drops in Brazil and India pushed the MSCI emerging markets index to its worst week ever. Oil fell as much as 9.2 percent to $78.61, copper was poised for its largest weekly decrease in two decades.

``We have reached the panic stage,'' said Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management, which has the equivalent of $48 billion. ``Fundamentals don't count anymore.''

The MSCI World index of 23 developed countries dropped for a seventh day as investors lost faith in government bank rescue plans, coordinated interest rate cuts and assurances from world leaders that the crisis will ease.

While stocks briefly pared declines early in the day, comments from President George W. Bush and Italian Prime Minister Silvio Berlusconi did nothing to restore confidence and equities resumed their plunge. Bush said the U.S. is using a ``wide range of tools'' to stabilize markets and sough to reassure Americans that the $700 billion rescue plan passed by Congress last week will work.

The S&P 500 declined 64.45 points to 845.47 as of 2:02 p.m. in New York, bringing its weekly drop to 23 percent. The MSCI World Index lost 7.8 percent to extend this week's slide to 22 percent, the most since records began in 1970. Europe's Dow Jones Stoxx 600 Index slumped 7.5 percent. Japan's Nikkei 225 Stock Average slumped 11 percent, the second-biggest drop on record. The MSCI Asia Pacific sank 6.9 percent.

Morgan Stanley

Morgan Stanley dropped 27 percent after Moody's Investors Service said it may cut the bank's credit rating. Rio Tinto Group, E.ON AG and Barclays Plc fell more than 10 percent in Europe. Exxon Mobil Corp. slid 8.9 percent as oil dipped below $80 a barrel on concern the economic slowdown will stifle demand.

Copper for December delivery fell 22.65 cents, or 9.4 percent, to $2.1795 a pound in New York. The yen headed for its biggest weekly gain in a decade against the dollar as investors sold higher-yielding assets to pay back low-cost loans in Japan.

Stocks pared declines after Berlusconi said European Union and Group of Eight leaders are discussing the idea of closing the world's financial markets. Berlusconi later said no such suspension was under consideration.

More than $25 trillion has been erased from global equities in 2008. Central banks from London and Frankfurt to Washington and Hong Kong this week were forced to cut interest rates after the yearlong credit-market seizure stoked concern banks will run short of money.

`Seized Up'

The cost of borrowing in dollars for three months jumped to the highest level since Dec. 27, the British Bankers' Association.

The London interbank offered rate, or Libor, that banks charge each other for such loans rose 7 basis points to 4.82 percent, the BBA said today. The Libor-OIS spread, a gauge of cash scarcity among banks, widened 11 basis points to 365 basis points. One basis point is 0.01 percentage point.

``The wheels of commerce have effectively seized up,'' said Kate Schapiro, who oversees $250 million in equities at Sentinel Asset Management in San Francisco. ``Trapped by the fear of losing everything, we're seeing one-sided selling.''

The VStoxx Index, which measures the cost of using options as insurance against declines in the Euro Stoxx 50 Index, surged as much as 39 percent to 81.38 today, the highest in at least nine years. The CBOE Volatility Index gained 17 percent.

`Panic Stage'

``What the market is discounting is that the western world, particularly the U.S and developed countries, can't live the way they have in recent years on borrowing,'' said Stanley Nabi, vice chairman of Silvercrest Asset Management Group in New York, which oversees $9.6 billion. ``We're going to have more sluggish, less vigorous growth than in the past.''

Russian stock exchanges delayed the opening of trading today and Indonesia extended a two-day halt. Iceland yesterday suspended equity trading today until Oct. 13 after the government seized Kaupthing hf, the country's biggest bank.

Russia's government will start buying stocks of domestic companies next week to help support prices, Prime Minister Vladimir Putin said.

Consob, Italy's securities-market regulator, banned all short sales on the country's stocks.

The Dow Jones Industrial Average fell below 9,000 for the first time since 2003 yesterday as higher borrowing costs and slower consumer spending spurred concern carmakers, insurers and energy companies will be the next victims of the credit crisis.

Default, Bankruptcy

``A very dangerous mix has taken place in the money and credit markets and hedge funds are clearly withdrawing flows from equities,'' said Francisco Salvador, director at Venture Finanzas SA in Madrid. ``We are waiting for some rational order to be restored, and very abrupt sell-offs are always followed by abrupt rebounds, but meanwhile we'll see panic.''

The cost of default protection on corporate bonds soared to records on concern the credit crisis will trigger more failures.

Credit-default swaps on Europe's benchmark Markit iTraxx Crossover index surged 57 basis points to 730, according to JPMorgan. Credit-market indexes in Australia and Japan also rose after the CDX North America Investment Grade index jumped in New York late yesterday.

New City Residence Investment Corp. filed for bankruptcy protection, becoming Japan's first real-estate investment trust failure. Yamato Life Insurance Co. also filed for court protection from creditors in the nation's first bankruptcy in the industry in seven years.

Morgan Stanley

Morgan Stanley dropped $4.76 to $7.69 after Moody's said it may cut the bank's credit rating on concern the financial crisis threatens earnings and investor confidence.

Mitsubishi UFJ Financial Group Inc., Japan's biggest bank, lost 8.5 percent to 710 yen. The company is in talks to buy a stake in Morgan Stanley.

Rio Tinto, the world's third-largest mining company, lost 12 percent to 2,424 pence. E.ON, Germany's biggest utility, sank 10 percent to 25.32 euros.

Barclays slipped 14 percent to 207.50 pence. The U.K.'s second-biggest bank said it's ``considering a number of options, including capital raising, relating to the industry-wide commitment.''

U.K. banks as a whole have until the end of the year to add 25 billion pounds ($42 billion) to their reserves under the government's plan, Barclays said in the statement.

Valuations

The MSCI World Index traded at 10.76 times the current earnings of the companies in the index, the cheapest since October 1982, according to data from JPMorgan Chase & Co. in London. The MSCI Europe Index traded at 8.34 times profit, the lowest since September 1981, the data show. The S&P 500 traded at 16.64 times earnings, the cheapest since September 2007, based on data compiled by Bloomberg.

Nobel Biocare Holding AG tumbled 27 percent to 21.38 francs. Before today, the company expected sales to rise in the ``low single-digits'' while profitability on earnings before interest and taxation was supposed to remain at 2007 levels at a constant exchange rate.

Chief Executive Officer Domenico Scala, the former Syngenta AG executive brought in to replace Heliane Canepa in July 2007, said Aug. 11 there were ``encouraging initial signs'' of recovery and that the worst might be over in the U.S. market.

To contact the reporter on this story: Sarah Thompson in London at sthompson17@bloomberg.net.

Last Updated: October 10, 2008 14:06 EDT