Global stock markets snapped a seven-day rally as concern about the health of the banking sector added to gloomy housing and consumer confidence data. Claire Shoesmithreports.
More than €2.6 billion was wiped off the value of the Irish market yesterday as concerns about the impact of the current squeeze on banks' liquidity on the broader economy again gripped investors.
European shares suffered significant losses and stocks in the US were all trading down.
The financials were the worst hit after Merrill Lynch, one of the world's leading investment banks, downgraded three large international financial institutions, citing turbulence in the debt markets, slowing takeover activity and upheaval in the mortgage sector.
Closer to home, stockbroking firm Davy lowered its share price targets for Ireland's four largest banks and said it may have to cut its earnings forecasts for 2008. It too cited volatility in global markets.
"It's that same old paranoia coming back into the market," said one Dublin trader. "In these weak markets it doesn't take much to knock things down."
He said that, in the current environment, it is becoming increasingly difficult to sell the Irish story and said that until the international mood changes he expects many investors to stay away.
The Iseq index of Irish shares fell 2.6 per cent - a more dramatic relapse than most of its European peers. It is down 14 per cent so far this year. The FTSEurofirst 300 index of top European shares closed down 1.7 per cent and has now erased almost all of this year's gains.
In the US, the Dow Jones Industrial Average and the broader-based Standard & Poor's 500 index were both off more than 2 per cent when the market closed last night.
In the UK, the FTSE 100 fell 1.9 per cent, while France's CAC 40 was down 2.1 per cent and Germany's DAX shed 0.7 per cent.
"What we have here is a phase where the markets are attempting to find a level around which they can stabilise," said Mike Lenhoff, chief strategist and head of research at Brewin Dolphin Securities in London.
Global stock markets have had a rocky ride over the past two months amid concerns that problems in the US subprime mortgage market - that lends to people with poor credit histories - are starting to spread into other areas of the economy.
Sentiment had picked up over the past week, but was dented again yesterday after a series of newspaper reports suggested that some investment houses, including Barclays, faced millions of dollars in exposure to asset-backed securities. Barclays denied the report, but dealers said people were more inclined to listen to bad news at the moment.
Elsewhere, sentiment was dented by new data showing that US home prices suffered their worst decline since at least 1987 in the second quarter, and by separate figures showing that consumer confidence was at its lowest in a year in August.
Merrill Lynch's downgrade of Bear Stearns, Lehman Brothers and Citigroup did little to help matters.
The analysts also reduced the profit forecast for another large US bank, JPMorgan Chase, but retained a buy rating on the bank.
(Additional reporting Reuters/ Financial Times service)