Posted on 08/16/2007 4:03:56 AM PDT by TigerLikesRooster
European markets gripped by fear
By FT Reporters
Published: August 16 2007 07:31 | Last updated: August 16 2007 11:57
European equity markets approached their lowest levels of the year on Thursday as concerns about financial companies and their exposure to the tightening of the credit market gathered pace.
Alex Lyle, fund manager at Threadneedle Investments, said the collapse of the subprime mortgage market in the US could spread to lenders around the world.
“Financial markets have seen significant volatility in recent weeks, driven by concerns over subprime mortgages in the US and high yield debt in general. This could have an impact on economic activity, primarily through the housing market, if lenders become unwilling or unable to lend to lower rated buyers. More expensive debt for higher risk vehicles will also act as some sort of brake on the earnings of financial organisations.”
However, he added that with strong growth in Asia the outlook for the global economy remained positive.
“Our economic model for the US has always anticipated a slowdown in housing activity, and we do not regard recent events as being materially worse than we had expected. US growth is no longer the driving force for the global economy, with rapid growth in China and many emerging economies, supported by a healthy recovery in Japan and core Europe. We therefore expect to see reasonable global growth combined with relatively low inflation over the next 12 months.”
But in Europe the correction of the region’s equity market which was sparked a week ago by the suspension of three investment funds by BNP Paribas on Thursday accelerated.
Fund manager Invesco fell nearly 10 per cent at one stage. The company, most of whose funds are in the US, has fallen victim to fears that it might be affected by the fall out from the subprime credit market. Fund managers, such as Man and Invesco, have also been hit by concerns over their exposure to the liquidity crunch that has felled some quant-driven hedge funds over the past few days.
Northern Rock, which relies particularly heavily on the wholesale money market for financing, fell another 6 per cent following a 5 per cent fall on Wednesday, making it one of the heaviest fallers in the region. The mortgage lender’s shares are down more than 40 per cent since the start of the year.
Overall, London’s FTSE 100 fell below the 6,000 level for the first time since March and hit a low for the year. By midday the index of the UK’s 100 biggest companies was down 161.8 points or 2.7 per cent at 5,947.5.
The Xetra Dax 30 in Frankfurt fell 178 points or 2.4 per cent to 7,267.98. The CAC 40 in Paris was 2.7 per cent weaker at 5,298.01, a loss of 144.7 points. The IBEX-35 in Madrid fell 2.6 per cent to 14,137.6 and in Stockholm the OMX 30 was 3 per cent lower at 1,148.98.
The falls in Europe followed heavy losses in Asia, where financial companies led the fallers too amid persistent worries about their exposure to losses related to the subprime mortgage sector in the US.
Mitsubishi UFJ Financial, Japan’s largest lender, fell 3.7 per cent in morning trade, while in Australia investment banks Babcock & Brown, Commonwealth Bank of Australia and National Australia Bank all fell more than 5 per cent.
Rams Home Loan, the Australian mortgage lender which on Wednesday warned profits would fall this year because of the turmoil in the credit markets, plunged nearly 60 per cent. The company said on Thursday it was unable to refinance A$6.2bn of debt.
The losses among financial stocks pushed the benchmark Nikkei 225 in Tokyo below the 16,000 level, before a late rally left it down 2 per cent at 16,148.49, its lowest close for 10 months.
Japanese exporters also fell as the yen continued its recovery against the dollar and other high yielding currencies.
The New Zealand dollar had its biggest fall against the dollar since the stock market crash of 1987. The Kiwi slumped 2.5 per cent against the dollar and 2.9 per cent against the yen.
Sterling fell to a five-month low versus the yen as the outlook for UK interest rates continued to weigh on the currency. Against the dollar sterling was $1.9828, after hitting a two-month low of $1.9806.
In the past three weeks, the New Zealand dollar has fallen 14.4 per cent against the yen, while the Australian dollar has lost 10 per cent. The pound and the euro have dropped about 6 per cent against the yen.
The South Korean won fell to a five-month low against the yen and the dollar. Foreign investors sold more than 1,000bn won as they sought the safety of the dollar and the yen. Investors also dumped South Korean shares in record quantities. The Korea Composite Stock Price index closed 6.9 per cent or 125.91 points lower, the biggest points fall on record, at 1,662.72.
Elsewhere in Asia, the Jakarta Composite Index ended 5.94 per cent lower at 1,908.64 points, adding to a 6.4 per cent slide a day earlier.
In Hong Kong, the Hang Seng closed down 703.33 points, or 3.29 per cent, at 20,672.39. The index has fallen 1,335 points, or 6 per cent, over the last two sessions.
In Singapore, the Straits Times Index closed down 121.09 points or 3.7 per cent at a four-month low of 3,152.16.
The escape from riskier assets pushed government bond prices higher for a fourth day. The yield on the benchmark two-year Treasury note fell 2 basis points to 4.27 per cent in London on Thursday. Ten-year yields declined 3 basis points to near two-week low of 4.7 percent. The spread between two- and 10-year yields was 42 basis points, near the widest since May 2005. On Wednesday the yield on teh three-month Treasury bill suffered its sharpest fall since 1989.
The falls in Asia and Europe were prompted by another sharp sell-off in the last few hours of the trading session in New York which left the financial sector bruised as concerns about the health of the US economy grew and calls for the Federal Reserve to intervene with an emergency rate cut grew louder.
Shares in Countrywide closed down 13 per cent after Merrill Lynch raised the prospect of the biggest mortgage lender in the US going out of business if short-term lending rates continued to rise. Countrywide shares are now down more than 50 per cent since the start of the year.
Fortress Investment Group, the hedge fund manager, dropped 8.6 per cent to $17.56, below its initial public offer price of $18.50. The drop followed a fall of 6.6 per cent on Tuesday.
KKR Financial was down more than 30 per cent at one point. The affiliate of the leveraged buy-out firm said it would lose about $40m on a $5.1bn sale of residential mortgages and warned that an additional $200m loss could be in the pipeline.
Financing problems in the vast commercial paper market this week have raised fears among investors that the funding for financial institutions and companies is faltering.
The mounting concerns about the state of the credit market sent the S&P 500 into negative territory for the year. The index closed 1.4 per cent down at 1,406.70. The Dow Jones Industrial Average closed down 167.45 points at 12,8641.47.
^FTSE FTSE 100 (last) 5,926.50 7:06AM ET (down) 182.80 (2.99%)
Just lower the basis points by one-hundred so the world can get back to work!
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