Jubilation over Fannie, Freddie bailout fades quickly

Increased uncertainty about the global economic outlook favored the dollar, which hit a one-year peak against a basket of currencies, and other currencies associated with safety and stability, such as the yen and Swiss franc.

Such concerns were likely to spread to European share markets, which were seen opening slightly higher in Britain but lower in Germany and France. Britain's FTSE 100 index was predicted to open as much as 4 points higher, the German DAX down 2 to 16 points, and the French CAC 40 down 3 to 10 points, according to financial bookmakers.

Large bank shares fell after a broad global financial sector rally on Monday, though they slightly outperformed the broad market.

In a 24 hour span, market sentiment went from relief that the top U.S. mortgage finance companies would not be allowed to fail and spark a broad meltdown, to caution that problems at other financial institutions have yet to be resolved and could still have a knock-on effect on the region.

"It was a knee-jerk reaction yesterday, but the long-term outcome is that you are not going to expect the U.S. economy to improve if the housing market does not fix itself," said Lucinda Chan, a division director with Macquarie Equities Ltd in Sydney.

Japan's Nikkei share average fell 1.8 percent, led by shares of companies associated with the technology sector or consumer demand, such as Kyocera Corp and Honda Motor.

Outside of Japan, Asia-Pacific stocks dropped 2.5 percent after posting their biggest daily gain of 2008 on Monday, according to an MSCI index. Financial sector stocks in the region fell 2.1 percent, while the materials sector dropped 4.5 percent.

Hong Kong's Hang Seng index fell 2 percent and is off 26.7 percent so far this year.

Goldman Sachs downgraded its view to neutral from attractive on Chinese banks, whose shares have been one of the bright spots in an otherwise dismal market. Among the reasons, analysts at the bank cited the risk of rising bad loans at property developers and a slowing economy.

BANKS IN THE CROSS HAIRS
High-profile financial sector analysts were out in full force on Tuesday, cutting their profit estimates for an array of banks.

Richard Bove, an analyst with Ladenburg Thalmann, increased his fiscal year 2008 loss per share view for Lehman Brothers by 17 percent, citing a volatile month in the securities industry. He also said the third quarter business of Goldman Sachs, the largest U.S. investment bank, was "lousy".

Washington's bailout of the top U.S. mortgage finance companies on Sunday, which could be the most expensive ever, won acclaim from policymakers around the world, eager for positive news after more than a year of fallout from the credit crisis.

The move to place the companies under conservatorship, similar to bankruptcy, also had an immediate effect on U.S. mortgage rates, which fell half a percentage point.

However, whether housing prices will stop falling is another issue altogether.

"The bottom line is that buyers are still not interested in buying depreciating assets and in any case have less money to do so whilst lending conditions remain tight and the inventory overhang is still huge," Calyon analysts said of the U.S. housing market in a note sent to clients.

"For now, the taxpayer is becoming increasingly embroiled in the housing market crisis and things will get worse before there is any sign of a turnaround."

The U.S. dollar rose against the euro but fell against the yen as more cautious trades pushed out the rush of risk taking on Monday.

The dollar fell 0.5 percent against the yen to 107.60 yen, though it remains well above a two-month low around 105.50 yen hit on Friday.

"The market has gone back to credit worries and concerns about a global economic slowdown, and the yen is being bought across the board," said Hideaki Inoue, chief manager of forex trading at Mitsubishi UFJ Bank.

The euro edged down 0.2 percent to $1.4090, creeping back down toward an 11-month low around $1.4050 hit on Monday.

Oil prices slipped as the firmer dollar outweighed the threat to U.S. production of another storm. Hurricane Ike was heading toward rigs in the Gulf of Mexico, an energy-rich area still recovering from Hurricane Gustav, though it had lost some strength.

The October U.S. light crude future was down 96 cents to $105.37 a barrel , having plunged more than $40 from an all-time high reached in July.

The benchmark 10-year Japanese government bond yield fell 3 basis points to 1.495 percent, pulling away from a one-month high of 1.550 percent hit on Monday.

Photo: Reuters