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It was another tough day on the markets yesterday, and it looks set to stay that way today.
The FTSE 100 fell more than 70 points to end the day at 6,161. In the mid-cap index, music retailer HMV issued its second profit warning in just three months, showing how rapidly business is deteriorating at the group.
The share price fell nearly 16% to 128.5p, on news that same-store sales fell 3% in the nine weeks to March 10th. CDs and DVD sales have been hammered by people migrating to buying their music online.
But in reality, HMV’s woes were the least of the market’s worries…
Banking stocks and other financials were among the worst hit in the FTSE 100 yesterday – there were vague rumours that a UK hedge fund has run into financial trouble, but the main worry is of course, the US sub-prime mortgage market.
We wrote yesterday about how markets seemed to be ignoring troubles in the sector (see The biggest threat to the world economy keeps growing). But it seems they only needed a little nudge in the right direction .
The Dow Jones Industrial Average fell 242 points yesterday to 12,075 as investors wake up to the fact that things are getting worse more quickly than they had expected. Investment banks were among the main fallers on news that delinquencies among subprime borrowers hit a four-year high of 13.33% in the last quarter of 2006, while foreclosures (repossessions hit an all-time high of 0.54%).
Meanwhile, Accredited Home Lenders looks like it could be the next sub-prime lending casualty – the group has warned it will have to raise cash after being asked to repay more than £190m to its backers. And it was among the lenders which analysts had considered less vulnerable.
Perhaps unsurprisingly, against such a backdrop, US retail sales were much weaker than expected, rising just 0.1% in February after coming in flat in January. And excluding car and petrol sales, retail sales fell 0.3%, the largest decline in nearly three years.
Treasury Secretary and ex-Goldman Sachs head Hank Paulson tried to play down the worries on CNBC. ‘If as I think is the case, the housing correction has bottomed, it shouldn’t be a surprise to anyone if these is some fallout in the subprime mortgage market… It is going to be painful to some lenders, but it is largely contained.’
But a growing number of pundits refuse to be convinced by bland assertions from talking heads with vested interests. After all, it was only in October that the National Association of Realtors was arguing for an early spring 2007 recovery (see Will US housing have a soft landing?)
‘I worry in terms of the bigger picture,’ said Barry Hyman of EKN Financial to Marketwatch.com. ‘There are now risks to economic growth and therefore risks to earnings growth.’ It seems that the American investing public is finally waking up to the fact that you can’t have a housing slump without the whole economy feeling the pain.
The US housing market was one of the main things worrying participants at our latest RoundTable discussion, and it looks like they were right to be concerned. You can read more of their views in this week’s edition of MoneyWeek, out on Friday.
And if you’re not already a subscriber, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.
Turning to the ongoing turmoil in the wider markets…
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In London, the FTSE 100 ended yesterday 72 points lower, at 6,161, as blue-chips were hit by heavy losses on Wall Street. Cadbury Schweppes stood out amongst the gainers, rising over 10% following news that US billionaire Nelson Peltz had bought a 3% stake in the confectioner. For a full market report, see: London market close.
Across the Channel, other European markets also tracked Wall Street lower. In Paris, the CAC-40 ended the day 63 points lower, at 5,432. In Frankfurt, meanwhile, the DAX-30 ended the day 91 points lower, at 6,623, with Commerzbank the day’s biggest casualty.
On Wall Street, the other major averages made losses to match the Dow Jones’s 242-point plunge. The S&P 500 was down 28 points to close at 1,377, whilst the tech-heavy Nasdaq ended the day 51 points lower, at 2,350.
In Asia, the sub-prime worries on Wall Street led to a sharp 501-point fall on the Nikkei 225 , which saw the index close at 16,676 today. The Hang Seng was also lower, falling 496 points to close at 18,836.
Crude oil was trading at $58.27 this morning, whilst Brent spot was at $61.11 a barrel.
Spot gold was last quoted at $640.80 this morning, over $5 lower than in New York late last night. Silver was also lower, at $12.67/oz.
And in London this morning, life insurer Legal and General announced a doubling of net income to £1.31bn, but warned that profit margins were likely to shrink. L&G shares had fallen by as much as 3.1% in early trading. In other news, Sainsbury‘s shares had risen by as much as 7% following a report in The Times of a meeting with CVC group’s advisers to discuss a bid.
And our two recommended articles for today…
Forget the US – choose China
– China will eventually overtake the US as the world’s largest economy, according to the Onassis newsletter, but how soon? To find out how both economies compare – and where to invest once current market wobbles are over, read: Forget the US – choose China
Why is market volatility so low?
– Ignoring the odd blip, market volatility continues to trend lower. Is is merely investor complacency, or is there a more rational explanation? And could market volatility remain low even if the US slides into recession? For the answers to these questions and more, see: Why is market volatility so low?