President Obama may have signed the huge $US787 billion stimulus package, but financial markets were not taking notice. They were too busy finding shelter against expectations of yet another banking crisis, this time in Eastern and Central Europe, which could ensnare most of the 15 Eurozone economies.

President Obama is also set to reveal a housing mortgage relief plan tonight, our time, to go with the poorly explained bank bailout package from last week. But there will be no impact on market sentiment. US banks are not exposed to the Eastern European economies, but many of their counterparties in Europe are, so the chances of a knock on impact from any problems is high.

That’s why investors were busy trying to hide in gold (but not other commodities), cash and in US Government securities, driving the US dollar to its highest level against the euro since December.

Not even a record result from retail giant Wal-Mart, could shake the gloom on Wall Street. In fact Wal-Mart’s result merely underlined how depressed the rest of the retail sector is, with plunging sales, store closures and job losses.

Markets were more worried about the spread of the crunch in Eastern Europe and some of Europe’s major banks were exposed after a downgrade warning from Moody’s — oil prices shed more ground, falling once again by more than 6%, copper, wheat and a host of other commodities fell, dragging commodity markets down to the levels seen in the depths of last November.

The Moody’s warning sent tremors through major markets across the region.

The agency said it expected “continuous downward pressure on east European bank ratings” because of deteriorating asset quality, falling local currencies, exposure to a regional slump in real-estate and the units’ reliance on scarce short-term funding.

The Financial Times reported that Eurozone banks have the largest exposure to central and eastern Europe, with liabilities of $US1,500bn — about 90% of total foreign bank exposure to the region.” These include the biggest banks in Austria, Germany, Sweden, Italy, France and Belgium.

“The Austrian banking system is the most vulnerable, with eastern Europe accounting for nearly half of its foreign loans, while Italian banks are exposed to Poland and Croatia and Scandinavian institutions to the Baltic states,” The FT reported.

Russia, Poland and Hungary, along with Ukraine and Latvia, are considered to be the most vulnerable in any crunch, and the most dangerous for western banks.

Polish and Czech sharemarkets fell to five year lows, while in Moscow share trading was temporarily suspended after sharp price drops on fears about the banks and the government downgrading its 2009 economic outlook to one of a 2.2% contraction in GDP, against the earlier forecast of a 0.9% fall.

Fears of a default like that of Russia in 1998 are back in the minds of those in markets.

Currencies fell sharply, with the euro down against the US dollar, and the Aussie currency also well under 64 US cents and falling. We have lost more than 2 US cents since last Friday.

Wall Street saw an across-the-board fall of around 4%, but the Standard & Poor’s 500 dropped 4.5% and both it and the Dow are both eyeing the 11-year low reached last November.

American Express lost 11% as its credit card defaults soared; Bank of America lost 10%, Citigroup 10% and JPMorgan Chase lost 9%.

Stockmarkets in Asia and Europe also fell overnight and a warning from Daimler, makers of Mercedes cars, shook some investors when it said it would lose money this quarter and that global car sales would fall 10% from last year. With General Motors and Chrysler submitting their post-bailout plans this morning to the US Government (and proposing more cuts in the US and Europe in car plants and jobs), Daimler’s warning raises the prospect of further downward pressure on the world’s biggest manufacturing industry.

Certainly, US analysts and even President Obama’s spokesman hasn’t ruled out Chapter 11 bankruptcy for the two companies as a way of driving the revamp of the US industry. Those comments underline just how difficult the situation for the two car giants, with strong-minded unions resisting big cuts on the one hand and bondholders holding out on the other.

Oil prices fell more than 6% in the day to below $US35 a barrel Tuesday, while gold prices jumped to a new seven-month highs. Copper shed over 6%, or more than 10 US cents a pounds; wheat, corn, soybeans and sugar all fell sharply, along with all other commodities except gold. Gold traded around $US971 an ounce; in Australian dollar terms, it’s at a near record $A1,512 an ounce.

Overall, commodity markets were dragged down to their lowest level since mid-2002. The key Reuters/Jefferies CRB Index of 19 commodity prices dropped for the sixth straight day and touched 206.27. Bloomberg said that was the lowest since June 2002. The index has fallen 10% so far this year.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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