Wake-up call’ for investors
By Michael Mackenzie and Saskia Scholtes in New York and Paul J Davies in London
Copyright The Financial Times Limited 2007
Published: July 27 2007 19:16 | Last updated: July 27 2007 23:41
Wall Street closed lower on Friday after a tumultuous week in which the S&P 500 index experienced its worst performance since September 2002 as heightened credit market concerns battered stocks.
London saw all this year’s gains wiped out. There were also heavy falls in Asian stock markets, European stocks were lower and corporate debt markets saw further sell-offs.
The selling rounded off a week that finally saw equity traders waken to the growing problems in debt markets.
The heaviest stock selling on Thursday was sparked by news that banks had been forced to pull debt sales for two of the biggest private equity backed buy-outs in the market.
Chrysler, the US carmaker, failed to attract demand for loans valued at $12bn and Alliance Boots debt worth £5bn was left on banks’ balance sheets.
Fears about an end to the leveraged buy-out boom added to the expanding crisis in US mortgage markets, where one of the biggest US lenders said this week that problems in the risky subprime market were spreading to more conventional loans.
Mr Paulson said in an interview on CNBC television that both the mortgage lending and leveraged buy-out markets had been marked by excesses.
“I think we could use some more discipline. We are seeing a reassessment of risk and that is leading to a market adjustment,” he said, adding that it was “healthy” that risk was being repriced.
Mr Paulson said problems in the US mortgage sector should remain “largely contained”, but stressed “this is something that will take a while to make its way through the economy”.
Stocks briefly rallied after Mr Paulson’s remarks but then resumed their descent.
By the close of trading in New York, the S&P 500 index was down 4.9 per cent for the week at 1,458.95 while the Nasdaq Composite Index was 4.7 per cent lower at 2,562.24. The Dow Jones Industrial Average was 4.2 per cent lower at 13,265.47 for the week.
News that the US economy had expanded at a 3.4 per cent annual rate and that core inflation moderated during the second quarter failed to improve sentiment.
The FTSE 100 finished at 6,215.2, erasing all its gains for the year. It hit a peak of 6,732.4 on June 15, when it was 8.2 per cent higher on the year. The FTSE Eurofirst 300 fell 5 per cent, its worst weekly performance since March.
A flight to safety saw US government bonds rally, the yen strengthen and emerging market debt and equities stumble. An index of the main indicators of risk across asset classes compiled by UBS showed that risk-aversion had hit its highest level since the terrorist attacks in September 2001.
The strengthening of the Japanese currency indicates an unwinding of the carry trade, in which investors borrow in cheaper currencies to buy higher-yielding assets elsewhere, which has been a significant source of liquidity in global markets.
Corporate debt markets slid, with investors doubting that a $300bn backlog of US bond and loan deals would clear quickly. Issuance of new US high-yield debt this month has sunk to the lowest level since October 2002 at the trough of the last credit crunch, said Thomson Financial.