GLOBAL STOCK markets rallied sharply yesterday amid hopes that the credit crisis had reached its nadir after Switzerland's UBS disclosed further writedowns and initiatives to raise fresh capital.
UBS said Marcel Ospel, its longstanding chairman, was stepping down in the wake of $19 billion of new writedowns and confirmed plans for a SFr15 billion rights issue. UBS also said it would gather its exposure to troubled US mortgage assets into a separate entity - in effect Europe's first "bad bank" in this crisis. The moves drove its shares 12 per cent higher at SFr32.40.
Investors drew heart both from the detail of the disclosures and from the fact that UBS's capital raising is to be underwritten by BNP Paribas, Goldman Sachs, JPMorgan and Morgan Stanley all of which had conducted extensive due diligence, implying that the numbers were credible.
Faith in the banking sector was further bolstered when Lehman Brothers, the Wall Street bank, said it was increasing its $3 billion capital-raising, announced on Monday, by $1 billion, citing strong demand. Its stock rose 11 per cent to $41.90.
Shares in Germany's Deutsche Bank closed up 3.9 per cent in spite of it revealing €2.5 billion of writedowns on its loan book and structured credit portfolio for the first quarter. However, some bankers said it was too early to say that the rebound in financial stocks would last, and the rally was partly driven by hedge funds closing short positions.
Marcel Rohner, UBS's chief executive, cautioned that it was wrong to base optimism on news from UBS alone. "We will need a few days and weeks to understand the broader significance of where we are. One institution alone will not be sufficient to judge."
Analysts expect Merrill Lynch and Citigroup, the two other banks most hurt by the market turmoil, to take additional provisions when they report results in the next few weeks. Goldman Sachs said it expects Citi to write down the value of its leveraged loan commitments and mortgage-related holdings by $15.8 billion and Merrill by $3.3 billion.
But these concerns did little to dampen stock market enthusiasm. In London, the FTSE 100 was up 2.6 per cent, while Dublin's Iseq closed ahead by almost 4 per cent.
The upswing prompted the dollar to rally sharply against European currencies, rising 1.2 per cent to $1.5590 against the euro by midday in New York. The euro also slipped by almost 1 per cent against sterling, touching 78.88p.
Bank of Ireland chief economist Dan McLaughlin said yesterday that the euro is overvalued against the dollar by at least 30 per cent on the basis of purchasing power parity (PPP). Under PPP, the same basket of goods in two countries should cost the same when converted into a common currency.
Dr McLaughlin said most studies put the euro's "fair value" PPP rate against the dollar at $1.10-$1.20. There is a policy vacuum surrounding the dollar which posed "downside risk" to forecasts that the US currency will rally to $1.40 against the euro by the end of the year, Dr McLaughlin added.
