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Global stocks shake with stress from US financial crisis PDF Print E-mail
Friday, 18 July 2008

AFP, LONDON  - World stock markets reeled again on Wednesday on uncertainty over the unfolding US financial crisis and the prospect of more gloomy comment from US Federal Reserve chief Ben Bernanke.

Bernanke has warned of economic gloom and his next comments are anxiously awaited by investors, after the collapse of US bank IndyMac and a rescue for US mortgage-financing firms Fannie Mae and Freddie Mac.
The New York Times said that "a sense of economic gloom" had descended on Washington even though President George W. Bush had tried to reassure worried Americans about the country's banks on Tuesday.
Markets are worried that the deep strains in US finance could infect overseas companies since foreign investors have large exposure to American home loans, dealers said.
In Europe on Wednesday, London shares dived 1.19 percent after slumping on Tuesday to the lowest close since October 2005.
Paris shed 1.03 percent and Frankfurt shipped 1.30 percent after ducking 6,000 points for the first time since October 2006. Amsterdam dropped 2.09 percent, Madrid lost 0.92 percent and Zurich dipped 1.70 percent.
"Goaded by bearish analysts, investors seem to be abandoning American banks in droves," the New York Times reported.
"While a fraction of the nation's banks are expected to buckle under their growing burden of bad loans, federal regulators, bank executives and analysts agree that the vast majority of institutions are sound."
Bank customers, most of whose deposits were insured, were not panicking "but shareholders, whose investments are by no means guaranteed, are running scared," the paper commented. It is becoming increasingly clear that even the strongest banks will be grappling with bad loans for years."
In Asia, the picture was subdued as investors hunted for bargains amid easing oil prices. Tokyo gained 0.05 percent, Hong Kong added 0.23 percent and Singapore won 0.16 percent, while Shanghai finished 2.65 percent lower.
Regarding Bernanke, investors will be "looking for clues and directions in terms of where the US economy might be heading over the next six months, and whether this potential threat of recession is something that they can overcome," said Hargreaves Lansdown analyst Richard Hunter.
"That clearly is going to have an impact in all sort of different ways for other global markets."
Wall Street had finished mainly lower on Tuesday as the leading Dow Jones Industrial Average slumped to a two-year nadir on mounting concern over US financial institutions.
Bernanke was set to appear on Wednesday in the House of Representatives for a second day of testimony on the US central bank's semiannual economic report.
"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities," Bernanke had warned on Tuesday.
The Fed report lifted its 2008 outlook for the US economy in a forecast that appears to show no recession.
But investors across the globe remain on edge over the possibility of a recession -- two or more quarters of negative economic growth -- in the United States, analysts said.
"The balance is again tipping towards fears of recession given that the (Bernanke) speech ... confirmed the particularly marked uncertainty weighing on the economy and persistent uncertainty about inflation," said Valerie Plagnol, the joint head of strategy at Credit Mutuel CIC in Paris.
Bush had expressed confidence on Tuesday that the country would emerge "stronger than ever before" from the current malaise.
However, opposition from lawmakers in Congress to the administration's proposal to save mortgage giants Fannie Mae and Freddie Mac "threatened to slow down the rescue plan, especially if lawmakers insist on making major changes to the package," the New York Times wrote.
In Asia on Wednesday, the Sydney stock market rallied 1.14 percent, while Tapei shed 1.81 percent and Manila closed 1.6 percent lower.
Some analysts argued that the United States could be facing the biggest financial shock since the Great Depression.
"This is by far the worst financial crisis since the Great Depression," said Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University's Stern School of Business.
"Hundreds of small banks with massive exposure to real estate will go bust," he predicted.
"Dozens of large regional/national banks (a la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust," he added.
However, Hargreaves Landown's Richard Hunter indicated that comparisons with the Great Depression were short of the mark.
"There is no question that there is an economic slowdown which we are well in the middle of at the moment, but I think any Great Depression-type comparisons are probably over-egging it at this stage," Hunter said.

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