US Credit Push Backfires As UK Bank Rate Spikes

The rate at which banks will lend to each other spiked to a three-month high today as markets appeared to brush-off the US Federal Reserves surprise $280 billion liquidity injection earlier this week.

The London Interbank Offering Rate (Libor), which is the sum banks charge to borrow money from each other, today rose from 5.84 per cent to 5.93 per cent - the highest point since the beginning of the year.

At the beginning of the week, the US Fed led a group of central banks, including the Bank of England, in agreeing to pump $280 billion into the market through an asset swap where lenders can exchange mortgage-backed securities.

Todays sudden rise in Libor points illustrates that despite the Feds action, risk-adverse banks are still cautious about the credit crunch and the global markets ability to withstand a slowdown, most pointedly a US recession.

Trading on the London market was subdued today, up 9.2 points at 5,701.6 by midday after closing down 84 points on Thursday as the weakening dollar spooked investors.

Gold prices continued to gain today, edging closer to the $1,000 an ounce mark as it rose to $997.00, as investors continued to seek out safer assets as fears remained about Americas ability to avoid a full-blown recession.

Oil prices receded from yesterdays $110 high as the dollar traded at $1.5557, against the euro down from $1.5587 while the Japanese yen reached100.62, down from 102.04

Overnight on Wall Street, shares reversed earlier losses to close 35.5 points higher at 12,145.70.

Figures published yesterday in the US, showed that retail sales unexpectedly fell 0.6 percent last month and the labour market continued to weaken, suggesting the pillar that had supported the U.S. economy’s expansion may be giving way.

Most Asian markets closed down this morning, after initial gains were overtaken by fears that China will raise interest rates again this weekend.

China central bank has already warned interest rates may continue to go up to curb inflation, which soared to a near 12-year high of 8.7 per cent in February.

Hong Kong’s Hang Seng index ended the morning session 150.13 points lower at 22,151.51, while Japan’s Nikkei 225 index closed 91.84 points weaker at 12,241.60.

Concerns over the fate of Bear Stearns, Wall Streets smallest bank, are also still high on persisitent rumours the bank is facing difficulties.

Bear Stearns shares fell in out-of-hours trading in New York to their lowest level for six years last night.

Dealers in Tokyo said that gathering rumours of a liquidity crisis at Bear Stearns had further damanged sentiment, causing a dismal end to the Japanese trading week and sending the Nikkei down nearly 200 points to a three-year low.

Brokers on foreign exchange and derivatives floors said they had even heard of instances over the past 24 hours where dealers at a variety of US and European banks had refused to take trades from Bear Stearns – a sign that other banks in the market may believe the US financial giant is in danger of collapse.

A speech by Ben Bernanke, chairman of the US Federal Reserve this afternoon, will be closely followed as economists are now largely concluding that America is finally in recession.

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