The gathering crisis in the subprime mortgage market in the United States is starting to send ripples through the broader economy.
Last week HSBC, the world’s third largest bank, removed its two top executives in charge of its US businesses because of problems in subprime mortgages that have cost the bank more than $US1.7 billion in provisions.
The shares in a number of leading subprime associated companies continue to fall heavily, while the shares in some home builders also fell on fears the crisis would further undermine their faltering prospects already badly dented by the slowdown in the overall housing industry.
US government securities rose in price and plunged in yield to six week lows as investors, especially those who participate in the refinancing of housing loans (particularly the subprime mortgage sector) parked their money in the safe haven of the US Government paper.
The rising cost of insurance against default in bonds backed by subprime mortgages is now threatening to spread into the less risky parts of the huge US home loan market.
How far it goes is up in the air because the two biggest insurers, Fannie Mae and Freddie Mac, are known not to have been operating in the subprime area. If that is the case then their non-participation will help calm nerves because they dominate the more credit worthy areas of mortgage insurance.
The 10 year US Government bond fell to around 4.67 per cent at on Friday; two basis points down on the previous Friday or about 0.1 per cent under the week’s peak.
It was the fourth straight weekly decline as those signs of a weaker than expected US economy persist.
US reports said shares in NovaStar Financial Inc and New Century Financial Corp (two of the major lenders to subprime clients) extended the losses of the past 10 days while more reputable operators in the home lending markets, such as Countrywide Financial Corp, Wells Fargo and even Wall Street blue-blood, JPMorgan Chase & Co saw their shares sold off on the growing concerns.
Default levels on subprime mortgages are at all time highs; perhaps as many as 20 lenders in the area have shut, closed down or sold themselves in the past year.
And while the US Fed keeps on making noises about the importance of containing inflation, hard headed investors on Wall Street are wondering if the housing crisis could be the trigger for a change in sentiment on interest rates to where averting a recession becomes more important than inflation.
Should the slowdown in housing continue or deepen because of the spreading worries about the creditworthiness of customers and some intermediaries, the wider US economy might be crunched.
This crisis is growing just at a time when commodity price inflation seems to be re-igniting, judging by the huge rally in metal prices on Friday.
With oil jumping above $US61 a barrel,that rally in metals, and those problems in housing and finance, US stockmarkets fell for the third day in a row on Friday and for the Dow it was the worst week’s performance since last August.
The Dow ended down 38 on Friday at 12,647.48, a loss of 0.9 per cent on the shortened week’s trading. The broader S&P 500 lost 5 points to end at 1451.19, down 0.3 per cent and the NASDAQ lost 9.84, to 2515.10 but finished up 0.8 per cent.
In the holiday-shortened week, the Dow lost 0.9 per cent, the S&P 500 decreased 0.3 per cent, while the NASDAQ rose 0.8 per cent. The Dow has now lost all of its gains so far in 2007.