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The ongoing fears over the impact of the US sub-prime mortgage fall-out continued to hammer markets across the world yesterday.
The FTSE 100 lost a chunky 160 points, closing down at 6,001. However, a rebound looks likely today, after Wall Street managed to claw back some ground, and Asian markets recovered sharply this morning – the Nikkei 225 regained 183 points to 16,860.
Of course, the talking heads immediately pounced on this, and are already yabbering that the worst is over…
Stocks look set for a rebound after another battering yesterday – a perfectly natural reaction after the kind of falls we’ve seen recently. But for some, it’s much deeper than that.
‘People have realised the US is not heading for recession, so there’s lots of liquidity and buyers out there… the pessimism of yesterday has given way to the optimism of today,’ said one analyst on Bloomberg this morning.
OK – it’s this guy’s job to sell stocks, so we shouldn’t be surprised at this kind of soundbite, any more than we should be surprised to hear estate agents talking up a falling housing market. But it’s still a breathtakingly mindless statement, coming as it does at what looks like being just the start of the biggest housing crisis to hit the US in decades.
In any case, our pessimism hasn’t gone anywhere. Only this morning The Telegraph reports that Barclays has demanded immediate repayment of £465m of mortgage loans from New Century Financial, the near-defunct US sub-prime mortgage lender. Barclays doesn’t expect ‘any material losses due to exposure to he sector’ – at least, not yet anyway. But it just goes to show how far this thing could stretch.
And Ambrose Evans-Pritchard, also in The Telegraph, points out that it’s not only the US sub-prime borrowers that are in trouble. In the UK, Southern Pacific Mortgage, one of the UK’s top 20 lenders, has had to ‘draw down 11.5% of its reserve fund in recent days to cover losses on a £510m home loan security’. Southern Pacific is a subsidiary of US investment bank Lehman Brothers.
Fair enough, compared with troubles in the US, ‘the scattered troubles in Britain look benign’ But as Pritchard-Evans points out ‘they looked benign in the US a year ago.’
So we think the tremors in the markets probably have a way to go – and even if this correction ends as calmly as last May’s, we can expect further trouble later in the year. But that doesn’t mean you have to bail out of the markets altogether.
There are plenty of stocks that still offer good value – two of our favoured sectors are looking very cheap at the moment, particularly after recent falls. The oil majors are still cheap, with BP and Shell trading on forward p/es of 9.8 and 9.3 respectively, and both yielding 4% or more.
Meanwhile, the mining sector looks great value – the mining companies keep reporting stellar figures, and yet the market remains fixated on the idea that commodity prices could collapse – which is why the likes of BHP Billiton trades on a forward p/e of 8.7, while Rio Tinto trades on a forward p/e of 9.
Our resident share tipster Paul Hill (for more on Paul and his share tipping service, click here: Paul Hill (/file/9843/paul-hill-.html)) reckons the City is too downbeat on prospects for commodity prices. You can find out why and read all about the three mining stocks he thinks you should have in your portfolio in the latest issue of MoneyWeek, out tomorrow.
Turning to the stock markets…
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As mentioned above, the FTSE 100 closed 160 points lower yesterday, at 6,001, with miners and financial stocks recording some of the day’s heaviest losses. Banks HBOS, Barclays and Royal Bank of Scotland were among the top ten fallers, as were mining stocks Antofagasta, Lonmin and Anglo American. For a full market report, see: London market close.
Elsewhere in Europe, shares tracked Wall Street losses to end yesterday sharply lower. In Paris, the CAC-40 closed at 5,302, a 240-point fall. In Frankfurt, the DAX-30 closed 176 points lower, at 6,447.
Across the Atlantic, US stocks recovered from earlier losses to close higher. Having fallen below the crucial 12,000 mark in intra-day trading, the Dow Jones gained 57 points to end the day at 12,133. The tech-rich Nasdaq closed 21 points higher, at 2,371, whilst the broader S&P 500 ended the day at 1,387, a 9-point gain.
In Tokyo, the Nikkei tracked US stocks higher to end the day 183 points firmer, at 16,942.
Crude oil was 36c higher at $58.52 this morning, whilst Brent spot was at $61.45 a barrel in London.
Spot gold climbed as high as $646.25 in Asia trading, and was quoted at $644.60 this morning. Silver, meanwhile, had risen to $12.85.
In London this morning, Dairy Milk-maker Cadbury Schweppes announced that it is to split its confectionary and soft drinks divisions into two seperate entities in order to unlock shareholder value. A more detailed announcement will be made at the company’s trading update on June 19. And in early trading in the City today, stocks had rebounded from yesterday’s losses, with the FTSE 100 as high as 6,087 at 0905.
And our two recommended articles for today…
What recent market falls mean for gold
– China’s market decline may have triggered sell-offs around the world, but that’s nothing compared to the threat posed by the US subprime meltdown (as demonstrated yesterday). And for gold investors, there’s another concern: why did the price of this supposedly safe-haven investment also fall during recent market declines? For gold commentator Paul van Eeden’s take on the situation, read: What recent market falls mean for gold.
How the rules of investing changed
– In the past, a bull market in one asset class was usually accompanied by a bear market in another. Yet none of the five major asset classes has significantly declined in value since 2002, says Marc Faber. Find out how to find the best investments playing by the new rules by clicking here: How the rules of investing changed