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Wednesday, July 11, 2007

Subprime fears dominate Wall Street

Subprime fears dominate Wall Street
By Michael Mackenzie in New York
Copyright The Financial Times Limited 2007
Published: July 11 2007 14:13 | Last updated: July 11 2007 15:52


Wall Street stocks were modestly higher at mid-morning on Wednesday, but worries over the subprime mortgage market remained the major talking point among investors.

“We’re locked in a tight range and subprime is probably going to dominate the news as we have nothing to trade off until Friday’s retail sales report,” said Scott Wren, senior equity analyst at AG Edwards.

On Tuesday, Moody’s downgraded a swathe of subprime mortgage-backed bonds, while Standard & Poors placed $12bn of such debt on notice of downgrades, sparking further selling of US corporate bonds and widening premia, or spreads, for derivatives that protect against corporate default.

With government bonds continuing to attract safe-haven buying, credit spreads in the US and Europe both remained under pressure, while the dollar has fallen to a new record low against the euro for the second day in a row.

In turn stocks were trading in a choppy fashion, and had turned positive after weakness in early trade.

At mid-morning the S&P 500 index was 0.2 per cent higher at 1,512.59. Among major sectors, materials, industrials and telecoms led gains. Financials were a touch lower , after a sharp fall on Tuesday, amid worries over banks’ potential exposure to the mortgage market and a possible credit crunch.

The American Stock Exchange Broker-Dealer index was down 0.5 per cent at mid-morning, after a fall of 2.9 per cent on Tuesday. Bear Stearns was down 1.2 per cent at $136.33, taking its loss this week to 5.8 per cent. Lehman was off 0.9 per cent at $70.44, and has fallen 5.8 per cent so far this week.

Equity volatility as measured by the Chicago Board Options Exchange’s Vix index was steady on Wednesday after a surge of 15.9 per cent on Tuesday.

“Markets are entering a critical phase,” said TJ Marta, strategist at RBG Capital Markets. He said, a stressful time looms for the global financial system, as downgrades of mortgage securities and structured credit is likely to spark involuntary asset sales and more hedge fund failures.

Meanwhile, investors are starting to worry that the US economy may face softer consumer spending as high petrol prices and the weak housing sector dampen sentiment.

“As US economic data shows a moderation from the second quarter rebound, that will add to fears that the economy is moving into a sustained downtrend,” said Mr Marta.

The prospect of weaker growth has heightened the importance of the second quarter earnings that are due over the next few weeks.

The S&P’s decline of 1.4 per cent on Tuesday was the worst one-day slide in the index in more than a month and marked a downbeat start to the second quarter earnings season. Analysts at Bespoke Investment Group said it was the worst start to a quarterly reporting period “since the bull market began in October 2002.” They noted however, “a negative first day has had no bearing on the performance of the market for the rest of the earnings season.”

At mid-morning, technology and bluechips were firmer. The Nasdaq Composite was up 0.1 per cent at 2,642.62 and the Dow Jones Industrial Average was 0.3 per cent higher at 13,536.98. Alcoa led Dow stocks with a rise of 1.2 per cent to $42.17, while Intel, down 0.7 per cent at $24.80 was a laggard.

Investors across a range of markets are expected to closely watch equities for any sign that credit woes will feed through.

“The lack of transparency in the credit market has left many emerging market participants focusing on equities as a better clue to risk aversion and risk liquidation,” said Alan Ruskin, chief international strategist at RBS Greenwich. “An extraordinary feature of the session is the sanguine state of equities.”

Among stocks in the news on Wednesday, Alcan was up 1.1 per cent at $87.12. The aluminium maker, currently being stalked by Alcoa, said it had secured a ”white-knight” bidder to stall the hostile $28.7bn bid - around $76 a share - from its rival aluminum producer.

Another stock in the news was NYSE Group, up 2.9 per cent at $80.09, after Lehman upgraded the exchange to ‘overweigh’ from ‘market weight’.

In company news, Liz Claiborne, the clothing maker confirmed it was seeking a buyer for 16 of its 36 apparel brands. The stock was down 0.3 per cent at $37.13.

Genentech, the biotechnology company, and Yum! Brands, the fast food operator, will release their second-quarter results after the closing bell. Yum was 3.5 per cent higher at $33.95, and UBS upgraded the stock from ‘neutral’ to ‘buy’.

Dendreon shares fell 0.4 per cent to $7.81 after the biotechnology company said the Securities and Exchange Commission was conducting an informal inquiry into its prostate cancer drug.

US stocks fell sharply on Tuesday, hurt by retail and housing sector earnings warnings. Financials were roiled by more bad news from the subprime mortgage market.

Late on Tuesday, Moody’s said it was downgrading 399 subprime mortgage bonds issued in 2006, with a further 32 issues on watch for downgrade. That followed news that S&P would place $12bn in rated subprime securities under review for downgrade.

Technology and blue chips were not spared from worries over the upcoming earnings season. The Nasdaq Composite fell 1.2 per cent to 2,639.16 and the Dow Jones Industrial Average closed 1.1 per cent lower at 13,501.70.

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