Banking woes push stocks towards 21-month low

World stocks fell towards this week’s 21-month low on Thursday as fresh concerns resurfaced over the financial sector—the epicentre of the nearly one-year-old credit crisis.

Woes at top United States mortgage lenders intensified overnight as Fannie Mae and Freddie Mac fell 13% and 23% respectively on concerns the two home finance firms may need to raise tens of billions of dollars of new capital.

Merrill Lynch—among several banks which report earnings next week—saw its shares fell nearly 10% after Fitch Ratings said it may cut the bank’s debt rating given expected writedowns and diminished prospects for earnings.

“All the US indexes are down, everything is down. Sentiment is bad, that’s it. I don’t see how we are going to get out of this anytime soon,” said Giuseppe-Guido Amato, analyst at Lang & Schwarz in Düsseldorf.

“The old problems are still the new ones.
People said that with the rescue of Bear Stearns, this was the beginning of the end. What rubbish! We see now that we are only at the end of the beginning. This is to be continued.”

The FTSEurofirst 300 index fell 1,8% while MSCI main world equity index fell 0,5% to stand just above Tuesday’s 21-month low.

Major equity indexes in the world have fallen in the past few weeks to stand down 20% from their peaks, plunging into bear market territory.

“Fears over the banks continue,” said Justin Urquhart Stewart, investment director at Seven Investment Management.

“But some shares have fallen to levels where they were in 1988 and people are increasingly thinking about value, which could prompt a rally in the next few weeks.”

Stagflation fears
Financial markets are facing headwinds as the credit crisis-induced slowdown in the US economy spreads into other parts of the world.

Adding to such evidence, data showed French industry output fell 2,6% in May, hit by a slump in the automobile and energy sectors. Italian industry output also fell.

Surging oil prices are also fanning inflation concerns, a case illustrated by fresh data showing Japan’s annual wholesale price inflation hit a 27-year high of 5,6% in June from a year earlier.

The euro slipped after French data to trade down 0,15% on the day at $1,5715.

“Overall, this [French data] clearly indicates that the European economy is decelerating very fast and confirms our view that the ECB will have to focus on growth in the medium term,” ING said in a note to clients.

The dollar was up 0,2% against a basket of major currencies.

Emerging sovereign spreads were unchanged while emerging stocks were steady on the day.

The September Bund future drew in some safe-haven demand, rising 10 ticks, although persistent inflation concerns were keeping investors from buying government bonds aggressively.

US light crude was steady at $136,15 a barrel, off last week’s record high above $145. Gold was steady at $926,40 an ounce, supported by escalating tensions in the Middle East after Iran test-fired missiles. - Reuters

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