Subprime woes continue to damp sentiment
Subprime woes continue to damp sentiment
By Christopher Brown-Humes
Copyright The Financial Times Limited 2007
Published: March 17 2007 02:00 | Last updated: March 17 2007 02:00
Financial markets rounded off another turbulent week on a steadier note yesterday, but fears that the crisis in the US subprime mortgage market could disrupt the global economy persisted.
Concerns about the subprime market - loans taken out by homeowners with poor credit histories - lay behind a sharp mid-week sell-off when Wall Street, Asian and European equity markets all recorded their second biggest one-day falls of the year.
Sentiment improved later in the week, although economic data released yesterday was not sufficiently reassuring to prevent further modest market falls.
A sharp rise in subprime mortgage arrears and default rates - as well as the increasing financial woes of the lenders involved in this segment of the market - triggered the mid-week rout.
Alan Greenspan, former chairman of the US Federal Reserve, warned on Thursday that rising subprime defaults could spill overinto other areas of theeconomy.
Stephen Roach, chief economist at Morgan Stanley, added his voice to the concerns yesterday, warning: "Subprime is today's dotcom - the pin that pricks a much larger bubble."
He said the crisis could hit US consumer spending as well as "the US economy,a US-centric global economy, and world financialmarkets".
Subprime woes threw a new spotlight on the US economy - in particular the outlook for growth and inflation. Data yesterday showed stronger-than-expected growth in industrial production in February, but also slightly weaker-than-expected consumer confidence in March.
Consumer price inflation, while in line with expectations, was interpreted as giving the US Federal Reserve little scope to cut interest rates in the near future.
Core inflation fell to 0.2 per cent in February from 0.3 per cent in January, but the annual rate remained at 2.7 per cent.
"Core inflation remains above the Fed's - specifically Mr Bernanke's - comfort zone and is likely to continue doing so for some months to come," said Gabriel Stein at Lombard Street Research.
However, he said the Fed needed to be forward-looking and consider cutting US interest rates early in the third quarter.
Wall Street fell yesterday, led by energy shares. The Dow Jones Industrial Average lost 0.40 per cent for a weekly loss of 1.35 per cent. The S&P 500 index fell 0.4 per cent, for a weekly drop of 1.1 per cent. Europe also ended the day lower, with the FTSE Eurofirst 300 index falling 0.1 per cent to 1,454.89. It closed the week down 2.3 per cent.
In Japan, the Nikkei 225 Average closed down 0.7 per cent at 16,744.15, leaving it 2.4 per cent lower on the week. All the main markets are down on the year.
The mid-week equity market sell-off was accompanied by a sharp rise in volatility, a rise in the Japanese yen, and a flight to safety that lead to yields on US Treasuries falling sharply.
But by the end of the week all these trends had at least partially unwound.
Yields on US 10-year Treasuries began the week at 4.59 per cent, but fell as low as 4.48 per cent at one point. By yesterday, they were back up to 4.55 per cent.
Volatility, as measured by the Vix index - also known as Wall Street's fear gauge - had fallen to 16.89 at one point yesterday, having spiked as high as 21.25 during trading on Wednesday when the Dow briefly fell below 12,000.
Concerns about a US slowdown also had an impact in currency markets where the dollar fell to its lowest level against the euro for three months.
This took the focus away from the Japanese yen, which has been at the centre of currency market turbulence in recent weeks, amid talk of an unwinding of the global carry trade.
This trade involves investors borrowing low-yielding currencies (such as the yen) to invest in higher yielding assets elsewhere.
Given the growth concerns, base metal prices proved remarkably resilient, with nickel prices hitting a series of new daily records this week.
By Christopher Brown-Humes
Copyright The Financial Times Limited 2007
Published: March 17 2007 02:00 | Last updated: March 17 2007 02:00
Financial markets rounded off another turbulent week on a steadier note yesterday, but fears that the crisis in the US subprime mortgage market could disrupt the global economy persisted.
Concerns about the subprime market - loans taken out by homeowners with poor credit histories - lay behind a sharp mid-week sell-off when Wall Street, Asian and European equity markets all recorded their second biggest one-day falls of the year.
Sentiment improved later in the week, although economic data released yesterday was not sufficiently reassuring to prevent further modest market falls.
A sharp rise in subprime mortgage arrears and default rates - as well as the increasing financial woes of the lenders involved in this segment of the market - triggered the mid-week rout.
Alan Greenspan, former chairman of the US Federal Reserve, warned on Thursday that rising subprime defaults could spill overinto other areas of theeconomy.
Stephen Roach, chief economist at Morgan Stanley, added his voice to the concerns yesterday, warning: "Subprime is today's dotcom - the pin that pricks a much larger bubble."
He said the crisis could hit US consumer spending as well as "the US economy,a US-centric global economy, and world financialmarkets".
Subprime woes threw a new spotlight on the US economy - in particular the outlook for growth and inflation. Data yesterday showed stronger-than-expected growth in industrial production in February, but also slightly weaker-than-expected consumer confidence in March.
Consumer price inflation, while in line with expectations, was interpreted as giving the US Federal Reserve little scope to cut interest rates in the near future.
Core inflation fell to 0.2 per cent in February from 0.3 per cent in January, but the annual rate remained at 2.7 per cent.
"Core inflation remains above the Fed's - specifically Mr Bernanke's - comfort zone and is likely to continue doing so for some months to come," said Gabriel Stein at Lombard Street Research.
However, he said the Fed needed to be forward-looking and consider cutting US interest rates early in the third quarter.
Wall Street fell yesterday, led by energy shares. The Dow Jones Industrial Average lost 0.40 per cent for a weekly loss of 1.35 per cent. The S&P 500 index fell 0.4 per cent, for a weekly drop of 1.1 per cent. Europe also ended the day lower, with the FTSE Eurofirst 300 index falling 0.1 per cent to 1,454.89. It closed the week down 2.3 per cent.
In Japan, the Nikkei 225 Average closed down 0.7 per cent at 16,744.15, leaving it 2.4 per cent lower on the week. All the main markets are down on the year.
The mid-week equity market sell-off was accompanied by a sharp rise in volatility, a rise in the Japanese yen, and a flight to safety that lead to yields on US Treasuries falling sharply.
But by the end of the week all these trends had at least partially unwound.
Yields on US 10-year Treasuries began the week at 4.59 per cent, but fell as low as 4.48 per cent at one point. By yesterday, they were back up to 4.55 per cent.
Volatility, as measured by the Vix index - also known as Wall Street's fear gauge - had fallen to 16.89 at one point yesterday, having spiked as high as 21.25 during trading on Wednesday when the Dow briefly fell below 12,000.
Concerns about a US slowdown also had an impact in currency markets where the dollar fell to its lowest level against the euro for three months.
This took the focus away from the Japanese yen, which has been at the centre of currency market turbulence in recent weeks, amid talk of an unwinding of the global carry trade.
This trade involves investors borrowing low-yielding currencies (such as the yen) to invest in higher yielding assets elsewhere.
Given the growth concerns, base metal prices proved remarkably resilient, with nickel prices hitting a series of new daily records this week.
posted by Carlos T Mock at 8:35 AM
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