Global Market Volatility: Sub-Prime Mortgages

This has been another wild week in the markets. The U.S. sub-prime mortgage problem is effecting markets worldwide. Yesterday, there was a massive sell-off in North America [GlobeInvestor], which caused a 2% decline in Asian and European markets. Specifically, the Nikkei 225 index dropped 2.92%, the Hang Seng lost 2.8%, Indian stocks dropped 3%, and Phillipine stocks lost 3.4% overnight. Subprime lending to people with poor credit ratings is the culprit behind this downward market pressure. We are seeing a number of large financial institutions finding themselves in a bit of trouble. An announcement from H&R Block Inc. dictates that they had to writedown $29 million off its mortgage arm due to bad debt. The HSCB is also having some problems of its own as they have mismanaged their US mortgage portfolio, having bad debts soar to $10.6 billion.

Lee Cheng Hooi at EON Capital in Kuala Lampur stated “the worry is that it could spill over and cause the U.S. economy to slow down, and this will cause a domino effect on the world economy.” Kim Yung-min, a fund manager at SH Asset Management in Seoul added, “if the U.S. sub-prime mortgage problems get worse, it could begin to hurt U.S. consumers, and that would be very hurtful for exporters. This month could be very bad.”

In Canada, the market may be supported by metals and energy stocks as oil hovers around $58 a barrel. The Canadian index is up 13.93 points so far today, let’s see how it finishes up the day!

This is the second time within the past half month that we have seen distinct cases demonstrating global volatility to actions that occur in geographically dispersed markets. Remembering back to the end of February 2007, the Chinese stock markets plunged to set off a worldwide sell-off with the Shanghai composite losing 8.8%, and the Shenzhen composite losing 8.5%; this caused markets to fluctuate around the globe including a 3.3% loss on the Dow. Some think that this was simply a correction due to large gains seen on the Asian markets for the many months preceding.

This is a different story. Could we be on the brink of a recession in the US? Will Canada also fall into this spiral? If mortgages, and subsequently, real estate markets tumble, consumers will not be able to spend as much on goods and services, etc, etc …

Let’s just hope this was another ‘correction’ in the marketplace.