Europe up too

[Monday]

Markets in Europe are finishing the day up an astonishing 10% after the announcement of a new round of actions designed to stabilize financial markets. The European Central Bank, the Bank of England, and the Swiss National Bank said they will put no limits on loans of dollars to the banks, and the swap line between the Federal Reserve and the corresponding central banks will be increased to accommodate whatever quantity of dollar funding is demanded. The Bank of Japan is considering similar measures, while the Bank of Australia said it will guarantee lending between banks. Although counterparty risk remains high and banks continue to hold onto cash due to fears that a borrower may collapse taking the funds with them, the three-month Libor lending rate and lending rates across Europe eased following the massive new injections of liquidity and the extraordinary measures taken to restore confidence.

In order to restore confidence, drive short term rates to more normal levels, and encourage lending, Germany said it will guarantee up to 400 billion euros in lending between banks and offer recapitalizations of up to 80 billion euros. And France said it will provide a total of 320 billion euros in guarantees and an extra 40 billion euros to help recapitalize banks.

The UK will inject 37 billion pounds ($64 billion) into Royal Bank of Scotland (RBS $1), HBOS (HBOOY $2), and Lloyds TSB Group (LYG $13) to keep the banks afloat. US Treasury Secretary Henry Paulson also intends to present plans to inject capital directly into banks later this week, the Wall Street Journal reported. Plans have not yet been finalized, but the Treasury Department said early this morning that the government is looking at varying ways to provide capital for banks. Schwab's Chief Investment Strategist Liz Ann Sonders pointed out this morning in her Breaking Commentary, What a Difference a Weekend Makes, that guidelines are being developed that will govern the purchase of bad assets, and the plans will include stock-buying efforts. She also details the major events that unfolded in Europe over the weekend and in early morning action. Ms. Sonders remarks are also available on Schwab.com.

Meanwhile, the G7 meeting in Washington that concluded on Friday night was short on specifics but finance ministers said in their communique that the current situation calls for "urgent and exceptional action." The nations must use "all tools" to support systemically important financial institutions and prevent their failure, and take all necessary steps to unfreeze credit and money markets. Separately, Phillips Electronics (PHG $20) is trading solidly lower after posting a drop in profits and saying its healthcare unit had seen a slowdown in orders in the past weeks, mainly due to the US. Phillips said it will slow its share buyback. Elsewhere, Russia's benchmark index closed down 6% since authorities had closed the market on Friday, and traders were unable to react to Friday's debacle in Asia. Iceland's market remained closed but is scheduled to re-open on Tuesday.

Schwab Center for Financial Research - Market Analysis Group