London: Global stock markets dived for the second day in a row on Friday, 10 August, with Asian and European traders dumping shares over fears of a widening crisis caused by the US subprime housing sector.
European markets opened about 2% lower, after Asian markets all closed down by between 2-4%.
Analysts said investors were alarmed by signs that losses in the US subprime mortgage market, high-risk property loans to which many US banks and investment funds are exposed, was spreading to other regions.
“Selling pressure was strong as the market fears more funds or financial institutions may disclose problems related to US subprime mortgages,” said analyst Conita Hung at Delta Asia Securities in Hong Kong.
BNP Paribas, France’s biggest bank, spooked the market on Thursday when it said it had suspended three investment funds exposed to the US housing market because it was unable to value the assets.
News that the US, Eurozone, Japanese and other central banks had pumped massive amounts of cash into the banking sector to forestall a lack of liquidity appeared to add to the sense of nervousness on global markets.
If the central banks’ actions aimed to reassure investors, “they took it the other way ... That is, that the problem is so big that the central banks had to intervene,” said Okasan Securities strategist Hirokazu Fujiki.
On Asia’s largest market in Tokyo, the benchmark Nikkei-225 index slumped by as much as 3% at one point before ending down 406.51 points or 2.37% at 16,764.09, the lowest closing level for almost five months.
Seoul ended down 4.2%, Sydney slumped 3.7%, Hong Kong slid 2.88%, Mumbai was down 2.65%, Singapore gave up 3.31% and Taipei lost 2.74%.
In Europe in early morning trade, the FTSE 100 in London fell 1.74% to 6,162.00, in Frankfurt the DAX was down 2.04% at 7,301.22 and the Paris CAC 40 shed 1.89% to 5,515.42.
Wall Street lost nearly 3% overnight.
The overriding fear of investors is that banks will tighten their borrowing terms in response to the subprime crisis to prevent further exposure and cover losses already incurred.
If liquidity is limited to such an extent that companies and consumers have inadequate access to credit, then this could drag on overall economic growth.
“As private sector banks, in a time of uncertainty, set aside more funds for their own funding needs, we are seeing a shortage of liquidity in the money markets,” said Societe Generale’s chief Asia economist, Glenn Maguire.
This was the reason the European Central Bank pumped a record €94.8 billion ($130.2 billion) into the eurozone banking sector on Thursday to help lenders shaken by the US subprime mortgage crisis.
The US, Japanese and Australian central banks also provided added funds to the financial system in an effort to calm fears about a credit crunch.
Maguire noted that global stock markets had already been rattled this year after the Shanghai stock market plunged in February.
“The falls we’ve seen on Wall Street and Asia are consistent with what we saw on 27 February when the Asian equity markets plummeted on the back of China (problems) and we have seen markets recover from that,” he said.
But he added: “We need to see confidence stabilise in the banking sector and the financial markets first before we see things start to improve.”
The dollar gained Friday as it benefited from its status as a safe haven in times of financial instability, although not against the yen, which was also higher as players unwound risky carry trades funded by selling the Japanese currency.
In Sydney, EL & C Baillieu Stockbroking director Richard Morrow warned that until such concerns ease, further market turbulence could be expected.
“We’re going to get extreme volatility until this subprime thing is somehow massaged away,” he said.