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FTSE drops as global markets fall

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10/08/2007

The UK’s leading stock index fell 1.83% yesterday as ongoing concerns about global credit markets shook investor confidence on both sides of the Atlantic.

The US equivalent of the FTSE, the Dow Jones, was hit even more badly, losing 2.8%, Germany’s DAX index fell 2%, France’s CAC-40 lost 2.17% and Japan’s Nikkei opened down 1.4%.

The crisis in confidence resulted from more bad news from the the US sub-prime mortgage sector, which has been causing jitters in the markets for some months now.

In recent years, billions of dollars have been lent to high-risk homeowners in the US, and the lenders have sold on these mortgages to investors via a process known as securitisation.

As interest rates have risen, many borrowers have defaulted on sub-prime mortgages, which many argue should not have been lent in the first place, and investor appetite for buying securitised loans has disappeared as a result.

As a result, liquidity in the money markets has dried up, and trading in some parts of the US mortgage and money markets have stalled. Investors have been forced to look elsewhere for other sources of cash, pushing up the interest rates at which financial institutions lend money to each other.

In a surprise move, the European Central Bank attempted yesterday to ease liquidity by injecting £64bn in bank credit to the European banking system.

It is the first time the ECB has acted in such a manner since 9/11. But the move may yet backfire.

 “When the ECB starts being vocal about injecting liquidity, if they ever wanted to create a sense of panic, that would be the way,” said Tom Hougaard, chief market strategist at City Index, a spread-betting company.

Edwin Rood, global head of money markets at ABN Amro, added: “The underlying problem cannot be addressed directly by the ECB and therefore we will see the same liquidity difficulties tomorrow and the next day.”

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