Singapore, 24 Aug Investor uncertainty grew on Friday (24 August) on concern the US economy could be heading for a recession and as three Asian banks reported multi-billion-dollar exposure to the US subprime mortgage crisis.
Asian stocks fell, led by financial firms and exporters, while Japanese government bonds edged up. Sentiment has improved compared with recent weeks but it remains vulnerable to fresh bad news.
That came late on 23 and 24 August when three of Asia’s biggest banks revealed a combined exposure to the U.S. subprime mortgage market of almost $13 billion.
The news raised fears that Asian banks, generally domestically focused and risk averse following the Asian financial crisis 10 years ago, were not as immune to the subprime crisis as investors had thought.
Shares in Singapore’s DBS Group Holdings, Southeast Asia’s biggest bank, state-controlled Bank of China and its Hong Kong subsidiary, BOC Hong Kong, all skidded today.
Still, financial markets have been calmer and more stable this week after the recent turmoil that shook stocks and sent investors scurrying for the safety of government debt.
MSCI’s measure of Asia Pacific stocks, excluding Japan, has rebounded 13% since hitting a five-month low last Friday.
The US Federal Reserve and the European Central Bank continued to take steps on Thursday to try to shore up wobbly credit markets, where confidence had been returning in baby steps after a full-blown crisis earlier this month.
The Federal Reserve said that the US commercial paper market, a vital source of short-term financing for US business, had shrunk more than 8% in the past two weeks.
Angelo Mozilo, chief executive of Countrywide Financial Corp, the biggest mortgage lender in the US, said the Fed’s actions had yet to relieve a logjam in credit markets.
“We still have a tremendous liquidity problem,” Mozilo said in an interview on CNBC television.
Mozilo’s comments followed news that Bank of America had invested $2 billion in Countrywide, a move aimed at restoring trust in both the besieged mortgage lender and the market.
Still, the US housing sector and the economy faced problems, Mozilo said in an interview with Reuters.
“I’ve seen this movie before and the ending of the movie always ends up in some form of recession,” he said. “I can see the economy slowing down substantially enough to give the regulators, the Fed some pause in what’s going to happen.”
The US Federal Reserve, which last Friday cut its bank-lending rate, injected $17.25 billion into the banking system and the European Central Bank was inundated with demand for fresh cash in a money-market tender on 23 August.
“There are some reasons to worry a little more. What started as a US-centric housing shock has started to move more noticeably toward a broader consumption slowdown, and now arguably risks morphing into more of a ‘global-financial-conditions shock´ if the Fed response is inadequate,” Goldman Sachs said in an investment note.
The recent market turbulence prompted the Bank of Japan to hold off from raising interest rates on Thursday in what had been considered a near-certainty only last month.
Australia’s central bank added a modest amount of cash to the banking system on Friday as previous generous injections of cash meant excess balances were already at record highs.
In its regular daily money market operation, the Reserve Bank of Australia added A$1.15 billion ($943 million), smaller than an estimated deficit of A$1.655 billion and the smallest amount in over two weeks. REUTERS