Global stocks suffered heavy losses on Tuesday, falling further into ‘bear market’ territory on fresh fears over the health of the banking sector as the credit crunch bites deeper on economic growth.
Dealers said concerns about the US banks in particular unsettled investors, setting up Asia and Europe for a bad day to leave most exchanges down 20% or more from last highs in 2007 — the definition of a ‘bear market’. “Credit woes across the Atlantic remain very much at the heart of traders’ concerns,” said Paul Webb, chief dealer at CMC Markets.
Investors were reacting to negative comment on the banks from US investment bank Lehman Brothers.
Lehman warned that the big US mortgage refinancing groups, Freddie Mac and Fannie Mae, could have to raise a combined $75 billion in fresh cash to meet their commitments.
European shares were also hit on Tuesday fresh concern about banks' financing, although a drop in the oil price and an investor sweep into safe-havens like drug makers and telecoms helped stem the slide in the broader market.
The banking sector fell to its lowest in five years as fears of more write downs and the need for additional capital raising to restore balance sheets tattered by the credit crunch dented shares in HSBC, UniCredit and others.
The European equities market got some respite mid-afternoon after Federal Reserve Chairman Ben Bernanke said the central bank may extend its emergency lending facility for big Wall Street firms beyond the end of the year, helping soothe some of the concern about banks' access to funding.
Wall Street stocks fell on Monday following sharp market swings as investors fretted about the second quarter earnings season, sensing major banks could unveil further losses, dealers said.
Large American corporations start revealing their latest quarterly results this week and some analysts believe that bank earnings will sustain further hits from a lingering credit crunch. “Everyone is reassessing the widely-held view that the worst of the credit crisis would be over by now and coming to the same conclusion — the worst may not be over and it might last well into 2009,” said Ed Yardeni of Yardeni Research.
Japanese shares closed 2.45% lower on Tuesday after briefly falling below 13,000 for the first time in nearly three months. Hong Kong lost 3.16% and Sydney fell 1.4%.
On other financial markets on Tuesday, oil prices steadied after sliding further from record highs a day earlier as traders banked profits.
Meanwhile, eight of the world’s most powerful leaders called on Tuesday for efforts to cool sizzling commodity prices, warning that soaring fuel and food costs were a threat to world economic growth.
The Group of Eight rich nations said it was ready to take action to cushion global growth from runaway commodity costs. But they stopped short of announcing concrete steps in a joint statement on the economy released on the second day of a summit in northern Japan.
G8 powers — Britain, Canada, France, Germany, Italy, Japan, Russia and the United States — said they remained positive about the long-term resilience of their economies, noting that emerging economies were still growing strongly.
At the same time, the world economy was “facing uncertainty” and risks to growth remained.
They expressed “strong concern” about oil and food prices, which they said “pose a serious challenge to stable growth worldwide, have serious implications for the most vulnerable and increase global inflationary pressure.”
The statement made no mention of the weakness of the US currency, although US President George W Bush told fellow G8 leaders that he was committed to “a strong dollar.”
In foreign exchange market activity, the dollar fell slightly against the euro on Tuesday.
