Banks hit again as credit fears spread

Financial Times
Saturday November 3, 2007

Fears of a fresh wave of losses arising from the credit squeeze spread around the globe on Friday, depressing stock markets in Europe and Asia and savaging bank shares for the second day in a row.

Despite a surge in US employment growth last month, investors remained worried that banks and other financial institutions still faced heavy losses arising from the troubled US mortgage market and related securities.

Market expectations that the impact of these losses on the broader US economy could spur the US Federal Reserve to cut interest rates further drove the dollar down to a new low against euro. The dollar’s slide in turn helped drive gold to a 28-year high of more than $800 an ounce and oil above $95 a barrel.

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Andrew Wilkinson, analyst at Interactive Brokers, said: “A daisy chain of market reports predicting continued writedowns and runaway credit losses” at the biggest banks and brokerage firms hit investor sentiment.

Merrill Lynch led the fallers as the bank tumbled nearly 8 per cent, extending its drop over two days to 14 per cent. Its latest fall followed a report over its dealing with hedge funds about its holdings of mortgage-related securities.

Merrill, still reeling from this week’s departure of Stan O’Neal, its chief executive, after news of fresh writedowns of its holdings of mortgage-related securities, said it had no reason to believe that any “inappropriate transactions occurred”.

However, the report added to investor fears that banks have yet to reveal fully the extent of losses from the credit squeeze. Among the fallers, Fortis dropped 4.4 per cent, Washington Mutual lost 7.4 per cent and Citigroup closed 2 per cent down after rallying from earlier losses.

Barclays was another prominent faller, dropping nearly 6 per cent when it was hit by rumours that it had approached the Bank of England for funding. The central bank later denied it had made any emergency loans.

Also hit hard were the specialist insurers of bonds and structured credit amid worries that they could be among the next casualties of the credit squeeze, triggering broader systemic problems. Ambac, a sector leader, dropped 20.5 per cent.

However, the broader US market rallied after early weakness with the S&P 500 index finishing 0.08 per cent up after a rally in technology stocks. In Europe, the FTSE 100 fell 0.8 per cent, making a loss of 2 per cent for the week.

Investors were pricing in 80 per cent odds of another US rate cut by the end of the year on futures markets.

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