Stockmarkets are in for a very nervy week after the failure of two banks on Friday night: one in Denmark and one in the US and the worries about the future of the two giants of American mortgage finance, Fannie Mae and Freddie Mac.
The support for the two US mortgage giants by the US Government and Fed, should help calm nerves today and allow the market to work out the impact and what happens next.
Everything that happens this week will spring for just how much support the US Government can give to these two central figures in the US housing crisis. They control $US5 trillion of debt in various forms, have trillions in assets, and are simply too big to fail.
The seizing of the failure of the IndyMac mortgage bank in California was the largest US bank failure for 15 years or more. It is in fact the second biggest failure in US history with losses estimated in preliminary reports up to $US8 billion.
There is around $1 billion in uninsured deposits: shareholder funds have been destroyed.
It is going to further damage confidence in the huge Californian economy and housing market which is one of the worst affected from the subprime collapse.
While Asian markets, including Australia finished higher on Friday, that will not be the case today as we’ll catch up to the very nervy trading Friday across Europe and the US.
On top of these financial worries, oil hit a new high Friday in US trading and there were concerns about the health of a British financial conglomerate.
Our optimism, which was driven by resource stocks, offset further weakness in banks on Friday.
That will not persist today. The futures market was signalling a 1.5% drop here today after Wall Street fell by well over 1% on Friday night (the losses early on as Freddie Mac and Fannie Mae shares plunged in early trading, were more than double that).
So it’s no wonder that the key global index, the MSCI World Index is now down 20% from its October record and nestling with the bears in Australia, parts of Asia, the US and Europe.
The MSCI World Index tracks 1,742 companies in 23 developed markets, lost 1.4% on Friday. It fell 12% in the first half of the year (the steepest since 1982) and is now 20.3% off its October 31 high.
The UK market became the eighth of the world’s 10 biggest equity markets to drop into a bear market since November.
Markets in the US, Japan, China, France, Hong Kong, Germany and Australia have retreated more than 20% from their peaks because of the credit crunch, the US subprime mess and housing slump, rising inflation and more than $US400 billion in write-downs and losses from financial companies since the start of last year.
During Friday’s roller-coaster session on Wall Street, the Dow dropped below the 11,000 level for the first time since July 2006. It trimmed that loss to close at 11,100.54.
For the week, the Dow lost 1.4%, its fourth straight weekly decline; Nasdaq slipped 0.3% for the week, while the S&P 500 slid 1.9% into the arms of the bear.
And American financial companies have led the slump into the bear market as the credit crunch, near recession and falling home values caused US homeowners to default on their mortgages.
Leading bank, Wachovia Corp, Fannie Mae and investment bank, Lehman Brothers have lost 70% in value this year. UBS in Switzerland has been weak, as have Citigroup, the strong Australian banks, Bradford and Bingley, Barclays and UK home builders (along with their US counterparts).
Consumer companies (retailers, media companies, consumer durables, like groceries, car companies, home builders) are dependent on discretionary spending, which has taken a hammering in the US, Japan, Britain, Australia and Europe this year.
That explains why the segment had the second-steepest decline among MSCI industries this year after financials. Rising inflation, high oil and petrol prices, plus surging food costs (and falling house prices) have hurt.
In Friday’s helter-skelter trading, all concerns about bear markets and international comparisons were moved to the sidelines as investors watched the shares in the two mortgage giants hammered, surge and then sold off again.
Fannie Mae tumbled 25% to $US9.98. Freddie Mac lost as much as 51% in early trading to $US3.89 before climbing back to $US7.20 in afternoon trading.
The rescue of IndyMac came late Friday afternoon in the US.
Lehman dropped 16% to $US14.47; Wachovia slumped 11% to $US11.75 and is had its biggest weekly decline in 25 years. It appointed a new CEO and reported a $US2.6 billion loss last week. It’s America’s 4th biggest commercial bank and home lender and it has been suffering because of the problems with subprime mortgages and the sharp fall in mortgage sales.
Freddie Mac is due to sell $US3 billion in debt Monday morning, US time: that will have to be supported, one way or another. An unsuccessful debt sale would imperil both groups.
We must remember that the Fed and US Treasury worked their rescue of Bear Stearns and its sale to JP Morgan on a Sunday, culminating in an announcement before trading started in Tokyo. This could be a similar situation today.
In Europe the Dow Jones Stoxx 600 Index fell to a three-year low and the London market entered a bear market.
The Stoxx 600 Index lost 2.7% to 270.36, the lowest since June 6, 2005. The index fell 3.3% last week, capping its sixth straight weekly drop.
Indexes retreated in all 18 western European markets except for Norway. France’s CAC 40 slid 3.1% and Germany’s DAX slipped 2.4%.
The FTSE 100 dropped 2.7%, pushing its slump from a June 2007 high to more than
