NEW YORK (AFP) — Global equity prices plunged Thursday amid fresh worries that problems in the US subprime mortgage sector are spreading beyond the US property market to the international financial sector.
Investors panicked over news the European Central Bank pumped a record ($130.2 billion) into the eurozone banking sector to help lenders shaken by the US subprime mortgage crisis.
“When the ECB starts being vocal about injecting liquidity, if they ever wanted to create a sense of panic, that would be the way,” said Tom Hougaard, chief market strategist at London-based spread-betting group City Index.
The ECB move came after a leading French bank, BNP Paribas, said it had suspended three investment funds exposed to the US property market because it could not fairly calculate their value.
BNP Paribas said it would resume calculation of the funds’ value “as soon as liquidity returns to the market,” leaving investors to wonder when they can withdraw their money.
The French bank’s announcement unnerved investors worldwide.
Accross Asia, markets tumbled sharply Friday with Philippine shares plunging by 103.24 points, or three percent, to 3,281.96 its sharpest single-day drop this year.
“We didn’t fall as low as I’ve expected given the overnight losses in New York,” said Eagle Equities President Joey Roxas. “What’s affecting us is mostly external...it’s the way the (US) subprime mortgage is affecting sentiment.”
Roxas said a rebound in local stocks will be determined by how US stocks move Friday.
April Tan, research head at CitisecOnline.Com, said while Philippine stocks remain fundamentally sound and now offer value after recent market fall, a lot “still depends on what happens in the US.”
In the United States, the blue-chip Dow Jones Industrial Average plunged 387.18 points (2.83 percent) to close at 13,270.68.
The tech-heavy Nasdaq composite fell 56.49 points (2.16 percent) to 2,556.49 and the broad-market Standard Poor’s 500 index tumbled 44.38 points (2.96 percent) to 1,453.11.
Earlier in Europe, London’s FTSE 100 index fell 1.92 percent, in Paris the CAC 40 lost 2.17 percent and Frankfurt’s Dax dropped 2.0 percent.
Investors fear that the US housing woes might eventually affect global economic growth if funds for business dry up although analysts said that so far the fallout appeared to be limited.
“Selling pressure was strong as the market fears that more funds or financial institutions may disclose problems related to US subprime mortgages,” said Conita Hung, head of research at Delta Asia Securities in Hong Kong.
“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.
He said there was a risk of a vicious circle of falling equity markets, widening credit spreads and a drop in the level of funds offered to money markets, which could ultimately force central banks to cut interest rates.
“But I don’t think we’re at that stage yet,” he added.
“The falls we’ve seen on Wall Street and Asia are consistent with what we saw on February 27 when the Asian equity markets plummeted on the back of China (problems) and we have seen markets recover from that,” noted Maguire.
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 Federal Reserve, meanwhile, added 24 billion dollars in temporary reserves.
Analysts speculated that liquidity crunch would push the Fed to cut its key federal funds rate by a quarter point to 5.0 percent at its next meeting in September. The central bank has held it unchanged at 5.25 percent for 13 months.
The ECB cash injection led some to conclude “that perhaps conditions are worse than what we previously thought, especially after the Fed said on Tuesday there was no real concern that the situation on the credit market will weigh on the economic expansion of the United States,” said Michael Malone, an analyst at Cowen Co.
US banks have suffered a sharp rise in defaults on high-risk, or subprime, mortgages and it is feared that losses by other banks and investment funds that are exposed to the US housing market could cause widespread financial problems.
“Given the kind of state of the market, you only have to mention subprime for people to start panicking,” said analyst Millan Gudka at investment bank Dresdner Kleinwort.