London: European and Asian stocks fell on 17 September 2007, while sterling hit a one-year low as concerns over financing for banks grew after UK mortgage lender Northern Rock tapped the Bank of England for an emergency loan last week.
Wall Street was set for a weaker open while safe-haven government bonds and the low-yielding yen rose as investors cut back on risky assets. The dollar held near last week’s 15-year low against major currencies ahead of an expected US interest rate cut this week.
The Northern Rock woes are fanning concerns that more financial institutions may have been hit by high interbank lending rates with overnight sterling deposit rates hitting a one-month high.
The recent rise in interbank lending rates could also squeeze corporates and other borrowers, which would in turn weigh on companies’ profits and slow consumer spending.
“The current Northern Rock situation will put a renewed focus on a link between consumption and housing. There will be tighter lending standards in the next 12 months at a time when the leverage is at a record high,” said Michael Metcalfe, senior strategist at State Street.
“In certain areas of the global economy, like in the US and UK, it will be remarkable if we didn’t get a sharp slowdown in consumption.”
The MSCI main world equity index was down 0.5%, while the FTSEurofirst 300 index fell more than 1.4% on the day.
Northern Rock shares fell more than 37%, adding to their 32% plunge on Friday. Other UK mortgage lenders and banks in Europe fell across the board.
The DJ Stoxx banking sector index hit its lowest since July 2006, bringing this year’s losses to 3%. US stock futures indicated a weaker open on Wall Street.
Credit concerns also hit Asian shares, halting four straight weeks of gains. MSCI’s measure of Asian stocks excluding Japan fell 0.9%. Japanese markets were closed for a public holiday.
“The valuation argument which has underpinned the market is vulnerable to challenge if one believes corporate profitability will struggle in light of slower economic activity,” said Jeremy Batstone-Carr, head of private client research at Charles Stanley.
RATES STILL ELEVATED
Sterling fell to its lowest since September 2006 on a trade-weighted basis and hit a new 14-month low versus the euro . The yen was up around half a percent against the dollar and euro.
The dollar held off its 15-year low against a basket of major currencies ahead of the Federal Reserve’s monetary policy meeting on 18 September when the central bank is expected to cut rates by as much as 50 bps from the current 5.25%.
The recent market turmoil has also raised expectations that the next move in UK interest rates would be a cut, helping bring down three-month interbank lending rates.
Three-month sterling rates hit a two-week low of 6.75125% at the daily London interbank fixing, having risen to a 9-year high last week from levels around 6 percent in early August.
However, overnight sterling rates fixed sharply higher at a one-month high of 6.46875%.