-Caveat Lector-
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From: [EMAIL PROTECTED]
Date: July 28, 2007 1:10:45 AM PDT
To: [EMAIL PROTECTED]
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Subject: Don't Say "Panic"
Global markets slump as
credit crunch panic spreads
Gary Duncan and Miles Costello
The Times, July 27, 2007
http://business.timesonline.co.uk/tol/business/industry_sectors/
banking_and_finance/article2148307.ece
Shares plunged worldwide yesterday as panicked investors fled stock
markets amid anxieties that the flood of cheap credit that has
fuelled a global boom in corporate deals is drying up.
Mounting fears that a credit crunch will end the easy lending that
has fuelled a wave of takeovers, and pushed shares to record highs,
sent shockwaves through markets on both sides of the Atlantic.
In a bloody day in the City’s dealing rooms, the FTSE 100 index
slumped by 203.1 points, or 3.2 per cent, to 6,251.2. £48.5 billion
was wiped off the value of Britain’s leading shares as the blue
chip benchmark succumbed to its sharpest points drop for five
years, and its biggest percentage loss since March 2003.
In New York, leading US shares were also battered, with the Dow
Jones industrial average at one point trading down as much as 447
points to 13,335.30, before later recovering to close down 311.50
points, or 2.3 per cent, at 13,473.60.
Related Links
Don’t panic, market still has mileage, says banker
The severity of the losses, as fearful investors stampeded for the
exits, triggered “circuit-breakers” at the New York Stock
Exchange designed to put the brakes on sudden plunges in stocks.
The broader S&P 500 index of US blue chips also dived by more than
2 per cent.
The latest in a series of triple-digit swings in the Dow’s value,
as well as London’s heavy losses, was deepened as worries over the
economic impact from the US housing market downturn were
exacerbated by news that sales of new homes in America tumbled by
6.6 per cent last month in the largest drop since a 12.7 per cent
plunge reported in January. A new jump in oil prices, to almost $77
a barrel, added to the edgy mood.
Other leading stock markets were also pounded. Shares on European
bourses fell across the board, in their most severe losses for more
than four months. Germany’s benchmark Dax index lost 2.3 per cent,
while France’s CAC 40 dropped 2.5 per cent.
Analysts said that the latest bout of turmoil worldwide was driven
by growing concern that the cheap finance that has driven a global
glut of corporate deal-making is evaporating as institutions
rethink the financial risks they have been taking on.
Ryan Larson, a senior equity trader at Voyageur Asset Management,
said: “The real concerns are about credit and oil pushing higher.
Wall Street continues to walk a wall of worry.”
The anxieties were initially sparked by the shakeout in America’s
sub-prime mortgage market amid a jump in defaults on loans made to
high-risk borrowers. But worries have intensified this week as
backers of big buyout deals have run into severe difficulty in
securing finance, despite increased interest rates, raising the
spectre of a broader “credit crunch”.
Those fears infected stock markets yesterday as investors fretted
that the deal-making driving share prices upwards may now run out
of steam, and sought sanctuary in the traditional safe havens of
government bonds.
The tremors in debt markets were underlined as the iTraxx Crossover
index, the key barometer of sentiment in credit markets, pushed
through 400 basis points (4 per cent) for the first time –
indicating that the cost of insuring against defaults on risky debt
has doubled since mid-June. The ABX benchmark index of US sub-prime
loans meanwhile sank to record lows.
“We’re watching the slow-motion suicide of the capital
markets,” one trader said.
Another added: “It’s just driven by fear at the moment. It’s
gone beyond the realms of irrationality.”
Among the casualties in the stock market fall yesterday was
Moneysupermarket.com, one of the year’s largest London flotations.
Shares in the online price comparison site opened trading at 170p,
the bottom of a preannounced range, valuing the firm at £843
million. But even that could not prevent heavy losses on its debut
as the shares suffered a baptism of fire to close down 12p at 158p.
More than £800 million was also wiped off shares in Legal &
General, the UK’s third-largest insurer. The near 8.25 per cent
fall in L&G’s share price came as lacklustre margins on its
business added to worries that the insurance sector is most exposed
to any stock market downturn.
The oil heavyweight Shell, the largest London-listed company,
reported a leap in profits to $7.5 billion in the second quarter,
but was also sold off. Its stock slid 2.1 per cent to £19.72.
Even the popularly held BT, despite solid results revealing its
highest quarterly share of broadband customers in nearly four
years, was not immune and its stock dipped 17¼p to 311p.
------------
Dollar tumbles as huge credit crunch looms
By Ambrose Evans-Pritchard
Last Updated: 1:07am BST 26/07/2007
http://www.telegraph.co.uk/money/
main.jhtml;jsessionid=DH1IMTVSFL21FQFIQMFSFFOAVCBQ0IV0?xml=/money/
2007/07/25/cnusecon125.xml
The dollar has tumbled to its lowest level ever against the euro
and to a 26-year low of $2.06 against the pound as financial
turmoil sent US markets tumbling to their worst day’s performance
in over four months.
US stocks were left spiralling along with the American currency on
fears of broader economic contagion from the sub-prime property slump.
The benchmark Dow Jones Industrial Average plummeted 226.50 points
to 13,716.90.
The fall caused London markets to tumble dramatically late in the
day. The blue chip FTSE 100 fell 125.7 points to 6498.70, while the
FTSE 250, which consists largely of UK-based firms rather than
multinationals, plummeted 198.20 points to 11,584. The FTSE was
little changed in Wednesday morning trading at 6504.70.
So deep were the concerns about the fate of the US economy, the
biggest single engine of global growth, that markets brushed aside
US Treasury Secretary Hank Paulson's attempts to allay fears of a
sharp US downturn, amid reassurances that a “strong dollar is in
our nation’s interest”.
"There has been a very significant housing correction. I think
we're at or near a bottom there. I don't deny there's been a
problem with sub-prime mortgages but it's quite containable," he said.
The closely watched DXY dollar index broke through a crucial
support to fall through 80 for the first time since 1995, raising
the risk of a disorderly rout as foreign funds pull their money out
of the US.
The euro jumped at one point to $1.3852 -- the highest level since
it was created in 1999. Meanwhile, sterling touched a high of
$2.065. By Wednesday's trading, the dollar had recouped more than a
cent of its losses against sterling and was back below $2.06. The
euro was also strengthened to below $1.38.
David Bloom, currency chief at HSBC, said the dollar had fallen
victim to growing fears of a US credit crunch, and likely knock-on
effects through debt markets. "Foreigners have made a $2 trillion
bet on US credit and now they're discovering it's not as good as
they thought," he said.
Mr Bloom said hopes of a brisk US recovery after the winter
slowdown were "melting away" as the housing slump continued to
hinder consumer spending power.
"The concern is that this could spread into equities, which have
been insulated so far. Then we have a major problem," he said.
The real spark for concern in equity markets was news of a 33% fall
in quarterly profits at Countrywide Financial, the largest US
mortgage lender, which also slashed its full-year profits outlook
USG, the world’s largest seller of gypsum wallboard for home
building, gave a similarly gloomy housing outlook.
JP Morgan added to jitters with a warning that US house prices
could fall 15% during the next two years as interest rates on
mortgage "teaser" loans adjust sharply upwards, triggering further
waves of defaults. It said the damage would continue to spill over
into the wider credit markets, where spreads on high-yield debt
punched up to two-year highs yesterday.
It usually takes months before widening credit spreads start to
infect equities but there were signs yesterday that this may be
drawing closer. Daniel Stillit, an economist at UBS, said the
squeeze in the loan markets would end the craze for jumbo takeovers
by private equity groups armed with debt, which have pushed up
stock prices. "Deal sizes are being scaled back, with far-reaching
implications for equities," he said.
The pound and the euro have taken the brunt of the dollar's slide
since the Chinese yuan is fixed to the greenback by a crawling peg,
and the Japanese yen has been held down by rock-bottom interest
rates. The failure of Asia to play its full part in the dollar
adjustment is causing major imbalances in the global currency
system. It has already prompted protests from French president
Nicolas Sarkozy. Although sterling touched a high of $2.0650
against the dollar yesterday, it hardly moved against the euro.
Roughly 65% of UK exports go to Europe, which is enjoying a mini-
boom. As a result, much of British manufacturing has been sheltered
from the strong pound so far.
But the first signs of stress among exporters are starting to
appear. The CBI's industrial trends survey released yesterday
showed a sharp fall in orders from +8 in May to -6 in June. It said
export orders had fallen "noticeably" for the first time in 18 months.
"UK exports had been resolute in the face of a strong pound but a
combination of a slower US economy and sharp increases in the price
of oil, commodities and freight is beginning to tell for
exporters," said Ian McCafferty, the CBI's chief economist.
-----------
Subprime coming home to roost?
By John Authers
Published: July 26 2007 19:27 | Last updated: July 26 2007 19:27
http://www.ft.com/cms/s/3e9f9006-3ba4-11dc-8002-0000779fd2ac.html
Practitioners on the ground in the credit market confront, instead
of an orderly correction, a situation where the market for riskier
forms of credit seems to have come to a complete halt.
US issuance of high-yield, or low-quality, debt stayed below $1bn
for the third successive week, according to Thomson Financial. The
last week of June brought $9.7bn of high-yield issuance; by last
week that had fallen to $322m. This financing is crucial for
private equity deals.
“The cancellation of high-yield deals and the inability of the
large banks to syndicate their leveraged loans is causing the
credit markets to shut down,” says T. J. Marta, strategist at
RBC Capital Markets. “Something has to give here: either equities
have to give it up or credit is going to implode.
“We knew this was coming,” he adds, “and the question is
whether we reach a critical mass that causes a financial seizure or
an economic event.” He says the next six to eight weeks, usually a
quiet time for markets as many traders take their vacations, will
be critical.
Problems for the credit market have also translated into further
weakness for the dollar, which was already at its lowest level for
more than a decade against various currencies before the credit
market’s woes began in earnest.
One big support for the dollar is the inflow of foreign money used
to buy US debt securities. If demand for these securities continues
to collapse, the dollar will lose another support. Another perverse
effect is that government bonds, subject to a dramatic sell-off
last month as traders reacted to stronger economic data, are
recovering. This is because investors are seeking a low-risk “safe
haven”.
David Ader, rates strategist at RBS Greenwich Capital, says: “If
it were only a story of the economic data, yields would be higher
for sure. But it’s not a case of the data but this grinding unwind
of risk and decrease in risk tolerance. It’s a process, it’s a
theme, and it won’t end tomorrow.” Admitting he does not know
the answer, he says traders are betting either that this return of
risk aversion hits stocks and hurts the economy or that it merely
hurts Wall Street, leaving Main Street unscathed.
Regulators, however, still appear to believe that the problem will
not cause a systemic crisis for the market and will require no
external intervention. Ben Bernanke, Fed chairman, in publicly
estimating subprime losses at $50bn-$100bn, declined to reassure
investors that the problem would not spread to other markets. But
the central bank still seems confident that the process at work is
a healthy one that will remove excesses.
“The punishment has been meted out to those who have done misdeeds
and made bad judgments,” said William Poole, governor of the St
Louis Fed, last week. “We are getting good evidence that the
companies and hedge funds that are being hit are the ones who
deserve it.”
This may justify the confidence of investors. Yet equity markets
were sending some warning signals before Thursday’s plunge.
Financial stocks have sharply underperformed, while the largest
stocks are outperforming smaller companies. This “narrowing” of
the market to the biggest names typically happens at the end of a
long bull market.
But equities can also point to separate means of support. US
corporate earnings appear to be on course to grow at an annual rate
of more than 5 per cent in the second quarter – impressive after
four years of uninterrupted strong growth. Companies are not
heavily geared, so costlier credit will not much dent their profits.
Until Thursday, emerging market equities were still within 1.5 per
cent of their record highs, while the price of emerging market debt
has fallen much less than that of US corporate debt over the past
few weeks. This suggests that confidence in the secular growth of
the big emerging markets remains intact, despite the current wave
of risk aversion.
Nor is the credit market the only source of liquidity. The large
sovereign wealth funds of oil-rich states and successful Asian
economies have a surfeit of cash and a need to place it somewhere.
China’s purchase of a stake in Blackstone, the giant private
equity house, and its role in Barclays’ bid for ABN Amro suggest
that this cash will continue to support the market.
Hence [through foreign investment] even some of the most aggressive
bears suggest stocks could avoid a decisive turn downward for
another year. As Mr Grantham puts it: “A few more bolts in the
bridge may fail, but in the end you have to bet that the bridge
will hold ... The odds of failure rise but they probably don’t
become high until October 2008.”
For the time being, there is less optimism in the credit market.
Jim Reid, credit strategist at Deutsche Bank in London, Thursday
recommended buying back into credit, having for months advocated
betting on spreads to increase. But he said he expected the credit
cycle to end “very messily” thanks to the “indiscriminate
leverage” seen during the bullish period.
He added: “As a minimum the thing we are in little doubt about now
is that having a huge derivative credit market does not give us a
new paradigm of permanently tighter spreads, but instead a
potentially violent and volatile credit market.”
Copyright The Financial Times Limited 2007
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