Gloom envelops world markets
Pastor Dale Morgan
Gloom envelops world markets*
By Saskia Scholtes and Michael Mackenzie in New York
Published: November 9 2007 20:54 | Last updated: November 9 2007 23:53
Stock markets on both sides of the Atlantic concluded their worst week
in months on Friday as deepening economic gloom raised expectations that
the US Federal Reserve would be forced to cut rates again in the face of
mounting credit losses.
The S&P 500 was down 3 per cent for the week. In London, the FTSE 100
fell 3.7 per cent on the week, while the FTSE Eurofirst 300 was down 3.1
per cent, their worst performances since the credit squeeze took hold at
the end of July.
The technology-heavy Nasdaq 100 experienced its worst week since April
2002, losing 6.8 per cent as market turmoil hit a sector that has been a
haven from the credit crisis.
Bond markets priced in the near certainty of a quarter-point interest
rate cut when the Fed meets in December, and a 75 per cent chance of a
second such cut at its January meeting. The yield on the two-year
Treasury note fell to 3.41 per cent, its lowest level since February 2005.
“Treasuries are strictly in flight-to-quality mode, and investors are
waiting for the next shoe to drop,” said Kevin Flanagan, fixed-income
strategist at Morgan Stanley. “This is round two and there will probably
be a round three.”
Rate cut expectations helped push the dollar index to a record low of
74.978. The dollar set a fresh low of $1.4752 versus the euro and fell
to Y110.52 against the yen.
The turmoil was fuelled by mounting credit turmoil. Fire sales of
mortgage assets from complex debt vehicles began in earnest after the
trustee of a $1.5bn complex debt deal managed by State Street Global
Advisors started liquidating its portfolio.
Ratings downgrades for mortgage securities have pushed a clutch of such
deals into default. Trustees have issued default notices for more than
14 collateralised debt obligation deals in recent weeks, representing
securities with a face value of more than $10bn.
A default means the most senior investors in the CDO can liquidate the
underlying assets to get their money back. Analysts say more deals are
on the brink of default.
Wachovia, fourth-largest US bank, estimated that the value of its
sub-prime mortgage securities fell $1.1bn in October and said it was
increasing loan loss provisions because of “dramatic declines” in house
prices in some parts of the US.
Bank of America and JPMorgan Chase also warned in a regulatory filings
that they could face further writedowns in the fourth quarter.
Fannie Mae, the government-sponsored mortgage company, said its
third-quarter loss doubled to $1.52bn. Capital One, the leading credit
card issuer, said more customers had difficulty paying their bills in
October than in the third quarter.