NEW YORK, 10 August 2007 — World stocks tumbled yesterday after BNP Paribas became the latest bank to be hit by mortgage credit problems and shortage of cash in money markets prompted the European Central Bank to add emergency liquidity.
The French bank froze more than $2 billion worth of funds as problems in risky US subprime mortgages and diminishing liquidity prevented it from calculating their value. The news sent shivers through markets already nervous that troubles in US mortgages would spread globally, hitting banks and the broader financial system. Investors rushed to buy safe-haven bonds and the low-yielding yen to preserve capital.
US stocks tumbled and safe-haven Treasuries rallied. The dollar climbed broadly but fell against the yen, which surged as investors cut their exposure to risky trades financed in the Japanese currency.
At midday, the stock market’s sell-off picked up speed with the broad Standard & Poor’s Index down 2 percent after The Wall Street Journal reported that a second Goldman Sachs Group hedge fund is suffering losses and selling positions.
After 1700 GMT, the Bank of Canada said it has injected C$1.455 billion into the markets to help with liquidity shortfalls. But the long end of the Treasury bond market had trimmed most of its earlier sharp gains after an auction of $9 billion of 30-year bonds attracted tepid demand.
The Dow Jones industrial average fell 166.89 points, or 1.22 percent, to 13,490.97. The Standard & Poor’s 500 Index was down 22.88 points, or 1.53 percent, at 1,474.61, off its session low at 1,465.87. The NASDAQ Composite Index was down 29.37 points, or 1.12 percent, at 2,583.61.
On Wall Street, fear about the subprime mortgage market was the dominant factor. “When there’s fear, there’s panic, and when there’s panic, there’s selling,” a dealer said.
“There appears to be a dash for cash both in dollars and in euros,” said Nick Parsons, head of market strategy at nabCapital. “Because liquidity in the market is drying up and because financing is also becoming more difficult, it seems that investors who need to finance their holdings of securities are not being able to draw on credit facilities and instead having to finance in the cash market. That’s putting up rates on cash.”
Euro deposit rates for overnight and next day deliveries hit their highest in October 2001. US dollar deposit rates for tomorrow/next day delivery posted their biggest one-day rise in eight years.
Short-end dollar interbank market rates rose with overnight jumping to the highest level since January 2001.
“No one really knows how big the current credit problems are and who does or does not have significant risk exposure. This is undermining confidence in the system as a whole,” said Charles Diebel, head of European rates strategy at Nomura International. “The problem here is that if funding costs spike, it will create a lot of issues for leveraged accounts and may force loss crystallization.”
The MSCI main world equity index fell 0.8 percent, while the FTSEurofirst 300 index was down more than 2 percent after hitting a two-week high on Wednesday.
The iTraxx Crossover index, a widely-watched indicator for European credit market sentiment, widened to 340 basis points. Emerging market sovereign bond spreads also widened.
The September Bund future was up 44 ticks. The yen was up one percent against the dollar and euro as investors trimmed yen-funded carry trade positions.