By Jeremy Gaunt, European Investment Correspondent
LONDON, Sept 8 (Reuters) - The U.S. government move to take
control of Fannie Mae and Freddie Mac sent global stocks jumping
and bond prices falling on Monday as investors unwound trades
set to protect them against impending financial meltdown.
The dollar recovered after taking an initial hit in Asia.
Oil rose above $108 a barrel.
In Europe, the FTSEurofirst 300 stock index <> gained
3.7 percent with the DJ STOXX bank index <.SX7P> up 7.4 percent.
Earlier, Japan's Nikkei <> gained 3.4 percent and
much-battered emerging markets stocks were up some 3.7 percent
as measured by MSCI <.MSCIEF>.
The U.S. government took control of mortgage finance
companies Fannie Mae <FNM.N> and Freddie Mac <FRE.N> on Sunday
in a huge bailout to support the U.S. housing market and ward
off more global financial market turbulence.
The action was prompted by worries over the enterprises'
shrinking capital which was undermining global confidence in the
financial sector, a key element of the bearish market mood that
has sunk stocks and boosted safe-haven plays for more than a
year.
By stepping in, the government has taken the edge off fears
of a meltdown, in effect guaranteeing bond holders but also
building confidence in the banking system.
Credit spreads on European banks and financial companies
tightened sharply after the move.
"You have reduced systemic default risk," said Paul Schulte,
regional strategist with Lehman Brothers in Hong Kong.
Like others, however, he suggested that there were still
plenty of problems facing financial markets and that Monday's
moves may not be long-lived.
Fannie and Freddie shareholders appeared set to be the big
losers. Freddie shares in Frankfurt <FRE.F> were down more than
56 percent.
The U.S. move, nonetheless, came as a huge relief to
overseas central banks and other authorities, many of which have
heavy holdings in the two mortgage agencies' debt.
"It should have a useful, tranquillising effect on the very
stressful market," said Joseph Yam, chief executive of the Hong
Kong Monetary Authority.
"The continued stress in the largest financial market in the
world ... has serious implications for the rest of the world ...
so these measures therefore are very comforting ones on a global
dimension."
UNWINDING PLAYS
The flip side of the unwinding trade was to prompt a
sell-off of government bonds, pushing yields higher.
Euro zone government bond prices followed U.S. Treasuries
and Japanese government bonds lower. Two-year European paper
yielded 4.128 percent <EU2YT=RR>, 12 basis points more than in
late Friday trade while 10-year Bund yields were 8 basis points
higher at 4.113 percent <EU10YT=RR>.
"We are in a markedly bearish tone for fixed income as the
Fannie and Freddie bailout news takes a bid into risky assets
and takes the shine off safe haven instruments such as bonds,"
said Richard McGuire, fixed income strategist at RBC Capital
Markets.
The dollar rose against a broadly weaker yen and recovered
against a basket of six major currencies, with some dealers
suggesting that the U.S. move may now allow for some riskier
currency trades.
The dollar was up nearly 1 percent against the yen <JPY=> at
108.82 and the dollar index <.DXY> against six currencies rose
0.3 percent, recovering from an earlier slide.
But the euro was up around 0.3 percent at $1.4305 <EUR=>.
"A key will be whether the relief of this continues, and if
it does, it could mean a weaker yen, and to an extent a weaker
dollar," said Steve Barrow, head of G10 currency research at
Standard Bank.
HURRICANE IKE
Oil rose $2 to more than $108 a barrel, rebounding from a
five-month low on worries that Hurricane Ike would tear through
the Gulf of Mexico, and with hopes in the background that the
U.S. bailout of its top mortgage lenders would help temper an
economic downturn.
Hurricane Ike weakened to a Category 3 hurricane as it bore
down on Cuba on Sunday, but was expected to retain strength,
entering the Gulf of Mexico as a severe Category 4 storm, a U.S.
Federal Emergency Management Agency official said.
It may threaten Gulf energy rigs that account for a quarter
of U.S. oil output and 15 percent of natural gas production.
Nearly 80 percent of the Gulf's oil production remains shut in
following Hurricane Gustav, and Ike's approach has forced Shell
Oil Co. to stop returning workers to its platforms.
(Additional reporting by Naomi Tajitsu and Emelia
Sithole-Matarise; Editing by Ruth Pitchford)
