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Equities tumble as AIG losses shock the markets

AIG yesterday announced the biggest corporate quarterly loss in history as 4th quarter 2008 figures showed a $61.7bn loss.  The troubled insurance company is integral to insuring households and financial risk globally and would pose a systemic risk to the global economy if allowed to fall.  AIG has already received support of $150bn and will now require further funding to sustain it.  The markets reacted swiftly to the news with US stocks falling to their lowest level in 12 years and the FTSE marking a slump of 5%.  The bleak outlook yesterday was not helped by HSBC showing pre tax profits for 2008 down by 62% on the previous year and confirmation that it is seeking to raise 12.5bn from shareholders to help the firm through the uncertain economic environment.

The news released yesterday simply compounded the fact that the economic downturn is deepening and looking likely to continue.  The knock on effect in the markets was a huge sell off in equities and a rush to the safe haven US dollar.  Sterling was sold heavily against the majors- rapidly falling towards 1.40 against the dollar and retracing to 1.11 against the euro.

Thursday will confirm the decision on interest rates for the Bank Of England and the European Central Bank; it is expected that both central banks will cut rates by up to 50 basis points.  Interestingly the Bank of Australia kept rates on hold at 3.25% last night, citing confidence in recent policy easing and stimulus packages as being sufficient to maintain confidence in the economy.  Could we see a similar stance from the BOE or ECB on Thursday?

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