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Foreign Stocks Tumble As Well

Posted August. 17, 2007 03:02,   


Once again, it was the subprime mortgage woes which dragged down U.S. Stocks.

Until the morning of August 15 (local time), the Dow Jones Industrial Index showed signs of upward movement following the announcement that the U.S. Federal Reserve Board would inject an additional $7 billion in liquidity funds through the Federal Reserve Bank.

However, when Countrywide Financial, the largest mortgage lender in the U.S., had its rating downgraded, fears of a credit crunch started to spread leading the Dow Jones Index to fall to 13,000, finally collapsing to 12,900.

The Dow Jones Index has dropped for five consecutive days, falling by 796 points, after hitting a record high last month, reaching the 14,000 level for the first time on July 19.

This was a decline of 8.1% compared to the highest level last month. S&P 500, showing a wider decline rate, has dropped by 9.4% since July 19.

The reason why the U.S. Federal Reserve`s continuous efforts to supply liquidity to the banking system have failed to avert market panic is because the uncertainty in the financial market remains a great pressure on investors.

As Goldman Sachs` largest hedge fund reportedly suffered a significant loss from subprime mortgage investment, after following Bear Stearns, Wall Street financials in New York heightened nervousness, asking, “What will be the next shoe to drop?”

After possibilities were raised that U.S. mortgage lender Countrywide Financial might face bankruptcy, TV news broadcasted, “Now the nervousness in the financial market has spread from Wall Street to the Main Street.”

There were different opinions upon future predictions of the impact.

The Economist, a British economic weekly magazine, predicted, “This will be an adjusting process to wipe out the existing bubbles, and ultimately develop a positive curve in the long run. However, there are some optimistic views that the economy will not slip into a recession thanks to the strong fundamentals of the U.S. economy.

However, as original expectations have been surpassed and subprime mortgage woes are causing a full-blown impact on the financial market, there are growing fears on Wall Street that the tightening credit conditions might lead to an economic slump.

The U.S. credit crisis lead to stocks falling in numerous European countries, including Great Britain, France and Germany and was echoed subsequently in the Asian countries as well, including Korea, Japan and China on August 16. In the Asian stock market, large sell-offs were made by foreign investors.

The Japanese central bank, Bank of Japan, reacted by pouring 400 billion yen into financial institutions in a bid to ease market panic through the open market operating on August 16; however, it was not enough to halt Japan`s Nikkei 225 index from falling.

The possibility of clearing yen-carry trade investments is increasing risk throughout the global financial market.

On this day, the move to sell dollars and buy yens caused the yen to appreciate to the 115 level against the U.S. dollar – a near five-month high since March 14.

Amid the trend to withdraw investment funds of high yielding assets for fear of a credit crash, Euro sell-offs have also continued, which brought the yen appreciate to the 155 level against the Euro after four months.