Asian markets look beyond the bailout

While US Congressional leaders and Treasury officials slept Sunday night – some of them for the first time in several days - Asian investors showed themselves unimpressed by the tentative $700 billion financial rescue package.

Markets from India to Japan fell on Monday despite the deal. Tokyo’s main index was down 1.3 percent and Hong Kong’s Hang Seng Index dropped 2.1 percent. It’s not so much because investors think Congress will vote down the deal - or because they don’t think it will work. Rather, market strategists suggest that investors are already looking beyond the salvation of the US financial system to think about the fundamentals of the world economy.

And the picture is not pretty. If the world economy was on the brink of recession earlier in the year, the current financial crisis seems likely to tip it over the edge.

It’s almost as if the markets have discounted the rescue package even before it has been passed. Perhaps, that is good news: At least investors are behaving as if there will still be markets in a few months’ time, rather than a complete meltdown.

But it seems probable that more banks will be going under before this mess is cleared up, and that it will be some time before the financial system regains some sort of stability.

That itself is worrisome to investors, but when they begin to think about the implications of the rescue package, some of them are also potentially troubling. For example, if the US government funds the package by issuing large amounts of Treasury debt – essentially printing money – that is bound to be inflationary.

And looking even beyond that potential problem, a recession will depress markets: On the Tokyo exchange Monday, shares in the world’s largest shipping company, Mitsui O.S.K. Lines, lost more than six percent. If global trade slows, cargo ships have less to carry.

Shares in automakers Toyota and Mazda slid too, on reports they are cutting production at their Chinese factories because of weaker demand.

So what might constitute good enough news to pull the markets up a bit? If the prospect of a $700 billion rescue doesn’t do it, what will?

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