For the second time in a week, Australian investors have taken fright and joined others around the world in selling the market in the face of an outbreak of problems in the US credit markets.
But the sell-off slowed in the US with a late rally overnight. Commodities were mixed but oil hit a new all time high of $US78.77comparedto the old mark of $US78.40. The price later fell back.
But the market ended stronger than the day before and that will help sentiment here today.
Around $48 billion in value was wiped off the Australian market: last Friday it was $41 billion. The market fell more than 3% yesterday, Friday it was 2.8%.
Yesterday's 203 point fall on the ASX 200 and 198 point fall on the All Ords topped Friday's 176 point fall as the biggest since September 11.
Led by Macquarie Bank, stocks with an involvement or interest in buyouts, high-yield bonds, hedge funds, or even suspected of being interested, were sold off after it said some of its high-yield funds may be affected by the US sub-prime mortgage rout.
Babcock & Brown, Allco Finance Group, and Challenger Financial Services Group followed Macquarie sharply lower on fears the fallout in the US, which hit Macquarie Tuesday night with the news that two of its Macquarie Fortress Funds could lose 25% in value of $300 million.
Macquarie Fortress joined Absolute Capital and Basis Capital in posting huge losses which could total $1 billion or more, depending on just how far the fear and turmoil drives high-yield bond prices lower.
The listed company, Mariner Bridge Investment, has written down the value of its sub-prime dealings, but analysts wonder if the latest slump in values in the US will mean a further write down.
Babcock and Brown issued a statement last night emphasising its minimal involvement with the troubled US sub-prime and derivatives markets.
The confirmed problems at a third Bear Stearns hedge fund with around $US900 million in assets, after trading closed in the US Tuesday night, also hit sentiment here and in Asia.
Despite billions lost by sub-prime mortgage lenders and financiers earlier in the year it wasn't until two Bear Stearns hedge funds revealed huge losses in June, forcing the investment bank to invest $US1.6 billion to cover losses, that the extent of the problem and its spread became known.
Those hedge funds are now worthless at a cost of possibly as much as $US2 billion.
And, yesterday there was confirmation that two private mortgage insurers in the US had lost $US1 billion in a joint venture that funded and dealt in sub-prime mortgages.
That was a further blow to sentiment in the US and here yesterday. And the US markets finished the month with a thud in what was the worst month in three years for US equities. The Dow peaked at a smidge over 14, 000; yesterday it was at 13, 212.
The Australian market though has suffered more: it peaked at 6,469 on July 13, yesterday it shed 198 points, at 3.2%, to 5,989, or where it was back in April. It is down 7.4% from its all time peak.
James Hardie shares fell after US house prices fell sharply in June, according to a monthly survey, and US mortgage defaults rose 58 per cent in the first six months of 2007.
Macquarie Bank fell more than 10% to $73.70, its biggest drop since February, 2002 on the news about the losses at Macquarie Fortress.
Babcock & Brown Ltd., Australia's second-largest investment bank, dropped 11.3% to $25. Challenger Financial Services Group, partly owned by James Packer, lost 6.6% to $5.20. Allco, which was involved with Macquarie, in the abortive bid for Qantas, shed 80c or 7.4% to $9.89.
MBL has tumbled 24% since reaching a record $97.10 in May. It closed at $82.50 Tuesday of this week.
Asian markets outside Japan fell by up to 4%. The MSCI measure of stocks outside of Japan fell 3.7%. Japan's Nikkei dropped below 17,000 for the first time since April 2 and the yen was within sight of a three-month high against the US dollar, which added to the selling in Australia and the pressure on the Aussie dollar.
Korean shares had the biggest daily fall in three years, with trading of stock futures halted for the first time this year.
It's the 'contagion' effect, when the impact of a drop in value and losses spills over from one asset (debt) class to others.
The failure in the US of a big mortgage company called American Home Mortgage, which had $US20 billion in assets and $US1.3 billion in net value a week or so ago, contributed to the very sharp 146 point fall on Wall Street Tuesday.
After strong gains in Europe and Asia Tuesday, markets there yesterday and last night turned down in reaction to the slump on Wall Street and the news from Australia and Japan where a couple of major banks reported lower first quarter earnings because of a sharp rise in local credit costs.
Australian banks were hammered, especially in afternoon trading. The NAB lost $1.28 to $37.08; Commonwealth shed a huge $2.01, to $52.25. Westpac lost 65 cents to $25.55 and the ANZ fell 78c to $27.52.
What surprised some investors was the way the local market opened down around 60 points instead of the 33 point fall as suggested by the overnight share price index trading.
The story from the US housing industry (slumping housing forced activity in the US housing market lower in June, according to official figures yesterday) is one of more pain to come. Rising defaults, falling prices (down 2.8% in 20 major metro markets in the US) points to further pressure.
The problems at American Home Mortgage echo last week's comments from the biggest mortgage lender in the US, Countrywide Financial, that debt and default problems were affecting better rated customers who were becoming later and later with payments.
So far in the US, the joblessness in the housing sector hasn't hit the j
