Credit fears return to rattle stock markets
Wednesday, 29 August 2007
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Stock markets resumed their downward trend yesterday after new economic data showed the US consumer, one of the most important planks of global growth, was feeling considerably less confident about the future.
Beset by talk of a credit crisis in the global financial markets and tumbling house prices across the country, respondents to the monthly Conference Board survey registered the steepest decline in confidence since the immediate aftermath of Hurricane Katrina two years ago.
The index fell to 105.0 from 119.5 in July, a drop that triggered renewed selling on Wall Street. The Dow Jones Industrial Average fell 280.3, or 2.1 per cent, to 13,041.9, while the FTSE 100, too, headed lower, closing in London down 117.9 at 6,102.2.
The US market decline accelerated after the minutes of the last Federal Reserve meeting from three weeks ago failed to give any hope to investors who have been betting on an interest rate cut.
Investors headed for the safety of government bonds, and sold off companies exposed to the credit markets, where the worst of the fall-out from the American mortgage crisis is being felt.
Shares in Barclays were the worst performers in the FTSE 100, falling 22p to 589p as the bank scrambled to deny several newspaper reports that it had hundreds of millions of dollars of failed debt investments. Bradford & Bingley, which makes one in five loans to British landlords, dropped more than 5 per cent. In the US, meanwhile, Wall Street banks' shares continued to come under pressure, for fear that they will have to report big write-downs in their forthcoming quarterly results.
Many commentators pointed out the consumer confidence index came in a percentage point or two higher than Wall Street had feared, and that a parallel measure of current economic conditions – as opposed to confidence in the future – remained at high levels. Nonetheless, there was a marked enthusiasm among some forecasters for using the "r" word – recession. "My guess is we're heading for a consumer-led recession beginning in a few quarters," said Michael Metz, chief investment strategist at Oppenheimer & Co. "The consumption boom is over."
The confidence data was accompanied by a new survey of city house prices which showed accelerating declines in many metropolitan areas. The Case-Shiller index fell 3.2 per cent in the second quarter from the same period a year ago, and prices are now in decline in 15 of the 20 metropolitan areas it tracks. Cities which had previously enjoyed a speculative boom have borne the brunt of the downturn, and rising numbers of foreclosures have also affected cities in the mid-West. Detroit, which is suffering from job losses in the car industry, registered an 11 per cent annual decline in prices.
The housing market downturn has been exacerbated by the crisis in the sub-prime mortgage industry, which handed home loans to millions of low-income Americans who are now struggling to keep up the repayments. Foreclosures are at record levels, and the best nationwide measure of house prices, out tomorrow from the federal government, could show the first-ever fall in the value of the average American home since the Second World War.
CIT Group, a consumer and commercial finance company, became the latest to close its mortgage-lending business yesterday, laying off 550 staff and saying it would take a $35m (£17.5m) charge. Meanwhile, the cost of insuring against the risk of default on corporate bonds issued by mortgage lenders rose.
The Federal Reserve released the minutes of its last regular monetary policy meeting on 7 August, when it held the main US interest rate at 5.25 per cent and said it remained primarily worried about inflation.
Less than a fortnight later, it had cut a secondary interest rate to try to restore order in the debt markets, but investors were still yesterday scouring the minutes of the earlier meeting for clues as to the future direction of the main Fed Funds rate. "Members expected a return to more normal market conditions, but recognised the process likely would take some time, particularly in markets related to sub-prime mortgages," the central bank's policy-setting Federal Open Market Committee said, according to the minutes. "However, a further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response."
