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Asia's Reaction to Failed Bailout -- Disbelief, Dismay
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Disbelief, disappointment, dismay -- these were the emotions expressed throughout Asia Tuesday after U.S. lawmakers unexpectedly rejected a $700 billion bailout plan for the financial industry.
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Panic gripped the region's markets, with Asian stocks plunging at the start of trade following Wall Street's biggest fall since the crash of 1987. However, as the session progressed, fear eased somewhat and markets pared back stark losses of as much as 6 percent.
Japan's Nikkei 225 Average [JP;N225 Loading... ()] closed 4 percent lower while Australia's S&P/ASX 200 Index shed 4.5 percent.
Australia's Prime Minister Kevin Rudd summed it up best, "The decision by the United States not to pass the measure by the U.S. administration is disappointing and a bad development."
Very bad indeed, and not just for Asian stock markets. Credit markets were locked up as banks hoarded U.S. dollar funds while the costs of protection against defaulting on borrowings and restructuring soared. Gold prices in the spot market pushed back over the $900 an ounce mark, rising 5 percent to touch a two-month high overnight of $920 an ounce. The U.S. dollar dropped to a 4-month low against the yen [JPY-TN Loading... ()]. The euro was also down against both the yen [$$EURJPY Loading... ()] and dollar [EUR-TN Loading... ()].
"Ultimately, this (bailout) is subject to U.S. domestic political processes. But we intend to be arguing this strongly, robustly in the days ahead. This (bailout) is necessary for the stabilization of not only U.S. financial markets, but global financial markets," Australia's Rudd told reporters at a press conference.
Central banks across the globe are already pumping enormous amounts of liquidity into markets. But despite this, investors are scrambling to eliminate any risk in their portfolios, loading up on traditional safe harbors like short-term U.S. government debt and gold.
Why Did the Bailout Vote Fail?
The general consensus from commentators on CNBC, was that the plan was poorly presented to the American people and Congress. The government's position that what was happening on Wall Street would have a severe impact on Main Street, was not effectively communicated.
In short, President Bush, Ben Bernanke Henry Paulson and the rest of Wall Street totally misjudged the feeling on Main Street.
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David Roche, global strategist at Independent Strategy thinks the plan was voted down, not only because ordinary Americans didn't understand it, but also because the plan is simply not a good one.
"It's a bad package and Main Street knows it. It was really a package geared to let banks get away with blue murder, without writing down their loans," Roche says. He hopes that the next plan will be more fair and one that will get the job done of cleansing the banks' balance sheets.
U.S. Democratic and Republican leaders have pledged to try and hammer out a revised financial bailout proposal, but it was unclear how much support a second modified plan will get. And it's also unclear when any such plan will go to a vote as Congress takes a one day break for the Rosh Hashanah holiday Tuesday and Wednesday.
"I think it's a travesty. I mean here's Paulson trying to tell the American population that their tax dollar bails out Wall Street, insinuating that if we don't have this package passed, that we're going to have a financial Armageddon. But it's so bad, we can't even get Congress to come in tomorrow? It’s ridiculous!", Ron Ianieri, chief markets strategist at Options University told CNBC.
So for now, it looks like fear and uncertainty will rule in the foreseeable future. The markets tend to anticipate what is going to happen not only in the U.S. economy, but also in the global market place. And it looks like more bank failures are in the works.
"You are seeing that actually happening throughout the globe with what's happened in UK, with the Fortis takeover, so I think it's going to take months. I would be surprised to see any kind of significant stability certainly in the next few months," says Michael Yoshikami, president and chief investment strategist of YCMNET Advisors.
How to Invest in this Market?
And in the meantime, if you still have money, what should you do with it?
Gold and cash, that's what all the analysts are telling CNBC Asia. Independent Strategy's Roche says keep cash, gold or buy into the most boring German bonds available.
YCMNET Advisors' Yoshikami also thinks high quality blue chips and well diversified companies like Johnson & Johnson and McDonald's is a good strategy.
"We're in a shakeout right now ... you need to have companies that are going to have an earnings stream that are going to be able to survive that and I think Johnson & Johnson ... and McDonald's, with a menu that is at least more affordable then other places, I certainly think are opportunities," Yoshikami added.
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Data is a real-time snapshot *Data is delayed at least 15 minutes
