Frankfurt/Singapore: Stocks in Europe and Asia tumbled sharply on Thursday, and US index futures fell, as the widening subprime mortgage crisis in the US sparked concern of a wider fallout to the global economy.
The FTSE-100 in London fell 2.75% in midday trading, while the CAC-40 of France dropped 3% and the DAX in Germany was down 2.5% after Asian markets slumped, led by a nearly 7% drop in South Korea on nervousness spreading there from finance professionals to ordinary small investors.
“The psychology is shifting notably today,” said David Bowers, a global strategist at Absolute Strategy Research in London. “When a market drops by 10%, people start to feel it in their portfolios. People are used to stock markets behaving in a non-volatile and even bullish manner.”
The losses reverberated most sharply in Asia, where investors were also shaken after Rams Home Loans Group of Australia, a non-bank lender which earlier in the week warned that its earnings could be hurt by rising costs for its US borrowings, confirmed on Thursday that it had been unable to refinance $5 billion (about Rs20,500 crore) in debt.
Big drop: Elementary school students take a picture at the Korea Stock Exchange Market in Seoul. Korea’s Kospi stock index fell 6.9%—or 125.91—to close at 1,691.98, its biggest decline in more than five years.
“It’s a kind of a panic among individual investors,” said Cho Hong Rae, head of research at Korea Investment & Securities in Seoul, adding that domestic retail investors had, up until Thursday, generally been buying shares as they declined.
Concerns are beginning to mount that the subprime crisis may generate a consumer pullback in the US, triggering an economic slowdown that may hit America’s export partners.
“Although today will likely again be dominated by concerns over credit markets, at some point the concerns will move to consumer confidence, consumption and the global economy,” ABN AMRO said in a note to clients.
President Nicolas Sarkozy of France, in a letter to German Chancellor Angela Merkel released on Thursday, said he did not expect current market volatility to affect the real economy, Reuters reported. But he urged authorities to be “very vigilant” over financial market corrections, and said he would seek a discussion about markets with the Group of Seven countries, central banks and the International Monetary Fund in Washington in October.
In Asia, governments were also keeping a close eye on market volatility. President Roh Moo Hyun of South Korea urged investors not to overreact to the global financial market instability, as the South Korean benchmark Kospi stock index suffered its biggest decline in more than five years on Thursday, falling 6.9%. Similar declines occurred in Indonesia and the Philippines.
“South Korea’s stock market is overly sensitive to the subprime mortgage financial crisis,” Cheon Ho Seon, a spokesman for the president, said at a news conference. “The fundamentals of the South Korean economy are solid and the impact from the subprime mortgage will be limited.”
Panic and frustration among small investors in South Korea were clear. In a small investors’ Web forum called the “Stocks Chart,” one investor with the username “pinkydol” lamented that all but one of the seven stocks he owned dropped by the daily limit on Thursday.
Sang-Hun Choe in Seoul and Heather Timmons in New Delhi contributed to this story.