The Hindu : Front Page : Sensex tumbles on U.S. worries

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Saturday, Jan 19, 2008
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Sensex tumbles on U.S. worries

Special Correspondent

Benchmark index loses 687 points; oil, gas, metal stocks hit

MUMBAI: The stock markets crumbled on the last trading day of the week as the Bombay Stock Exchange benchmark 30-share index (Sensex) lost 687.12 points or 3.49 per cent. Oil and gas, realty, bank and metal stocks pulled down the indices on uncertainty in the global economy. There was across-the-board selling by domestic and foreign investors who sensed trouble after a Fed Reserve report showed a decline in manufacturing in the U.S.

This was one of those weeks that the market recorded weakness every day as foreign institutional investors (FIIs) were net sellers in the last few days.

The Sensex lost around nine per cent and the NSE Nifty around eight per cent over the week.

World-over, markets were witnessing weaknesses. Citigroup, UBS and Merrill Lynch were reeling under sub-prime problems, said S. Ranganathan, Head of Research, LKP Securities. This month, all attention would be on corporate results and quarterly earnings numbers. “This month is going to be a volatile one for the stock markets. We have already witnessed four years of bull market. One cannot have too high expectations. For a longer-term, stock markets remain positive, though this month may remain volatile,” Mr. Ranganathan added.

The current financial sector slump will continue through 2008 and into 2009, testing bank creditworthiness, said Standard & Poor’s Ratings Services in a report published titled “After the credit boom, banks and brokers face a sobering year in 2008.”

Heavy write-downs

“The downturn is unsettling because it comes in the context of relatively strong global economic growth and historically low corporate default rates,” said Standard & Poor’s credit analyst, Scott Bugie. The structured finance market has been significantly affected and it may take years for the market to return. To date, the large financial groups have announced $90 billion in write-downs of collateralised debt obligations (CDOs), sub-prime securities, and leveraged loans. “Although the CDO write-downs have grabbed headlines, of equal concern is the systemic risks the downturn has highlighted,” Mr. Bugie added.

Because sub-prime mortgage risk is embedded throughout the financial sector, the downturn in U.S. housing, particularly in the sub-prime segment, has led to a series of negative events in the global debt markets.

In 2008, earnings of banks and brokers should continue on the weakening trend that started in the second half of 2007, particularly in the U.S. credit quality in the U.S. and European consumer finance sector will likely erode, and troubles in mortgage finance may spread to the commercial real estate sector, putting further pressure on performance. Earnings in 2008 will also suffer from additional losses on structured securities backed by sub-prime mortgages and other assets.

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