Jul 14
Fannie/Freddie rescue plan perks up shares, dollar
By Jeremy Gaunt, European Investment Correspondent
LONDON (Reuters) - A U.S. rescue plan for troubled mortgage agencies Fannie Mae and Freddie Mac propelled European shares sharply higher on Monday and lifted the dollar off near-record lows against the euro.
Government bonds were weaker on the growing risk appetite but Asian shares failed to benefit from improved sentiment.
The U.S. Treasury and Federal Reserve called on Sunday for sweeping measures to lend money and buy equity if necessary in Freddie Mac and Fannie Mae, government-sponsored enterprises (GSE) owned by shareholders.
The plan is an attempt to calm investors after stocks of both plummeted more than 40 percent last week on fears the companies, the cornerstones of the U.S. housing market, were under-capitalized.
Fannie and Freddie own or guarantee $5 trillion of debt, close to half the value of all U.S. mortgages. Foreign central banks, mostly in Asia, hold $979 billion of the bonds and mortgage-backed bonds sold by the agencies.
“The ramifications of all this seem to suggest that the U.S. realized they cannot tolerate further pressure on the U.S. housing sector,” said Nomura rate strategist Charles Diebel.
Five-year debt spreads between Fannie/Freddie and U.S. Treasuries were holding at about 80 basis points after shrinking almost 30 basis points on Friday in the biggest one day move ever.
Typically, Fannie/Freddie debt would trade fewer than 10 basis points over Treasuries. Some investors have said the likely government bail out make the GSEs’ debt attractive. Continued…
The Frankfurt-listed shares of Fannie and Freddie were up almost 18 percent.
EUROPEAN SHARES BOUNCE
The U.S. plan triggered a relief rally in Europe, with the pan-European FTSEurofirst 300 climbing more than 1.3 percent.
“The U.S. authorities are doing everything they can to prop up the financial system … It’s good news in an unremitting cycle of gloom,” said Peter Dixon, economist at Commerzbank in London.
Sentiment was also boosted by British bank Alliance & Leicester, which said it was at an advanced stage of discussions about a takeover offer. A&L shares soared 45 percent.
Earlier, Japan’s Nikkei stock average abandoned early gains to close down 0.2 percent.
Banks initially rose sharply after the U.S. Treasury/Fed plan was unveiled, but investors locked in profits later before stepping to the sidelines to wait for U.S. trade.
The benchmark Nikkei finished at 13,010.16, having lost 29.53 points, its lowest since April 15. The broader Topix was down 0.4 percent at 1,280.72.
DOLLAR BOUNCES Continued…
The dollar bounced off a near-record low against the euro.
“(The U.S. plan) is something that improves sentiment generally in the market, with risk appetite and so on, and it will also be positive for the dollar,” said Johan Javeus, FX strategist at SEB Merchant Banking in Stockholm.
“But we are still in a trend which is quite dollar negative so it may be a temporary relief.”
The euro was down 0.6 percent on the day at $1.5845, having earlier come within half a cent of April’s record highs of $1.6018.
The dollar index, which tracks its progress against a basket of six major currencies, added 0.7 percent buy prescription drugs online without prescription to 72.281, bouncing off a 2-1/2 month low set before the U.S. announcement.
The greenback was also up 0.5 percent at 106.76 yen.
Euro zone government bonds were generally weaker. Two-year bond yields were 2 basis points higher, while 10-year yield bond yields were just less than 1 basis point lower at 4.465 percent.
(Additional reporting by Kirsten Donovan and Rebekah Curtis, editing by Mike Peacock)
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