JEDDAH, 15 March 2007 — US and European stocks plunged to fresh 2007 lows yesterday on fears of losses in the fast-deteriorating US subprime mortgage market would spread to other assets and regions. Asian stock markets also took a dive.
Investors fear the problems of lenders who make subprime loans to people with poor credit are spreading to mainstream financial firms and will worsen the US housing slowdown.
US stocks had opened higher but turned lower in afternoon trade, with the Dow and broader S&P Index down more than 1 percent at one point as investors fretted anew about troubles faced by lenders who make loans to borrowers with weak credit. The Dow fell below 12,000 for the first time since November.
In midday trade, losing issues outnumbered gainers nearly a three-to-one ratio on the New York Stock Exchange.
The blue-chip Dow Jones industrial average was down 50 points, or 0.40 percent, at 12,028.54.
The broader Standard & Poor’s 500 Index was down 0.15 percent, while the technology heavy NASDAQ Composite Index was down 0.07 percent.
European stock exchanges fell sharply yesterday, with the London FTSE 100 index losing 2.61 percent to close at 6,000.70 points.
In Paris, the CAC 40 shed 2.52 percent to finish at 5,296.22 while in Frankfurt the DAX lost 2.67 percent to end the day at 6,447.70.
Across Asia, stock price screens were awash with red. Tokyo shed 2.92 percent, Hong Kong sank 2.57 percent, Sydney lost 2.1 percent, Shanghai slid 1.97 percent, Manila fell 3.38 percent, Seoul declined 2.0 percent and Singapore shed 3.06 percent.
The 30-share Mumbai stock exchange Sensex index tumbled 453.36 points or 3.49 percent to 12,529.62.
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Riyad Bank Chief Economist and Vice President Khan H. Zahid told Arab News, “The US housing market news may have surprised Wall Street so it reacted negatively on Tuesday. The Wall Street slump spread to other Asian and European markets the following day. This is a globalized world. All markets are interrelated and move together in panic, so they followed Wall Street’s downturn.”
Zahid was apparently referring to the Dow Jones Industrial Average which was rocked by the second-biggest drop in almost four years on Tuesday. However, Zahid said, “The global economy is strong. The main housing market is not affected yet. So we expect the market will rebound because fundamentals in the world economy are still very strong.”
Acording to Dr. Mohamed Ramady, visiting associate professor, King Fahd University of Petroleum and Minerals, what is more worrying is the potential impact on blue chip financial institutions. “The market volatility is to be expected — to ebb and flow over the next few weeks, following the initial sharp fall in China last week, until the markets find appropriate levels based on sector technical and fundamental evaluations. This is what actually happened — with recovery in most markets following the earlier falls. This time, however, there seems to be genuine market nervousness about particular sectors in the US economy, which could trigger sharper falls and could indicate the beginning of a recession in the US economy.”
Ramady pointed out that this nervousness stems from the importance of the housing market to the US economy as a barometer of other economic sector activity. “All indications are that inflation and rising interest rates have now begun to bite on American mortgage borrowers, and the number of home repossessions and bad debts are rising in this sector. What is more worrying though, is the effect on blue chip financial institutions in funding so called subprime lenders, who had lent mortgages to those with poor or marginal credit history. In a booming economy and strong employment demand this is fine — but in an economic slowdown and rising unemployment, this lending policy seems to be somewhat misplaced. The fear now is how to limit the financial blow to prime banking names in the face of the near bankruptcy of subprime lenders such as New Century Financial.”
Despite the fears and market worries, Ramady seems to believe that while some investors will shed riskier assets, many others will ride the storm and buy into underpriced assets globally. “This is the beauty of globalization — you can pick and choose, and markets will punish mercilessly those that have misjudged, either in pushing prices too fast and creating an asset bubble, or those that forgot basic fundamental credit policy rules.”
The Saudi stock market, however, bucked the trend yesterday. The Tadawul All-Share Index (TASI) rose 40.93 points to 8,603.1. TASI has risen 8.44 percent since the beginning of the year. Over SR21.55 billion worth of shares changed hands yesterday in 463,701 trades. The volume of shares yesterday was 400,841,138.
Out of 86 stocks traded, shares of 41 companies increased while 42 companies were in negative territory yesterday.
In the banking sector, shares of the Saudi Investment Bank and Saudi Hollandi Bank declined while shares of other banks rose yesterday.
The Telecom, Services and Agriculture indices declined yesterday.
Etihad Etisalat (Mobily) shares fell 1.27 percent to SR58.25 yesterday. Saudi Telecom Co. (STC) shares dropped slightly to SR76.
— With input from agencies
