Global stocks dive on skepticism over US mortgage rescues

Analysis

World equity markets fell heavily again on Tuesday on skepticism that a dramatic US government rescue of two mortgage giants had put a stop to a financial crisis, dealers said.

European equities sank lower after more steep losses overnight on Wall Street and earlier in Asia, despite a US rescue on Sunday to increase credit lines for Fannie Mae and Freddie Mac, and amid the failure of IndyMac bank in California. In early morning deals, London lost 1.40%, Frankfurt fell 1.80% and Paris dropped 1.34%.

Amsterdam was down 1.69%, Madrid declined by 1.18% and Zurich dipped 1.42%. In Asia, Hong Kong plunged 3.8%, Tokyo tumbled by almost 2% to reach a three-month low point, and Sydney sank by 2.1%. The dollar, meanwhile, plummeted close to its historic low against the European single currency.

World stock markets were given a temporary boost on Monday in the wake of the US rescue plan for Fannie Mae and Freddie Mac -- but analysts said that the positive effect has since evaporated. “The euphoria following the weekend announcements in support of the US agencies has faded very quickly and as a result risk aversion is higher and equities are lower,” said Calyon analyst Mitul Kotecha. “Asian equities slumped following disclosures by many banks of bond holdings in US agencies, with financials leading the move lower. Concerns in the US as to whether more banks are going to collapse has added to the market malaise which must have left policy makers in a sense of bewilderment given the short-lived bounce in sentiment.”

In Tuesday morning deals the euro raced as high as $1.5994, which was not far off the record 1.6019 hit on April 22. “Along with the US and Asian equity markets, the dollar has not been able to hold initial gains resulting from Sunday’s US Treasury announcement,” said Commerzbank analyst Antje Praefcke. “Though this was in line with our assessment of this developing situation, the failure of IndyMac and the spectre of further consolidation in US regional banks has resulted in a further knock to confidence.”

In Asia, Tapai dived 4.51%, Seoul shed 3.2% and Manila lost 1.79%, while Shanghai slumped by 3.43%. Wall Street stocks had tumbled in volatile trade on Monday amid growing investor unease about the banking sector, following the failure of IndyMac bank and concerns about other banks’ finances. California-based IndyMac bank was taken over by federal regulators over the weekend as it fell into insolvency, with depositors lining up Monday to withdraw their savings. (Economic Times)

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