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Credit market worries spread

We spoke yesterday about worsening conditions in the credit markets, as fears from the subprime mortgage bond market had spread to the corporate and high yield debt markets.

Today we see more evidence of a contagion of fear, as credit fears join with worries over higher oil prices and the state of the U.S. housing market. The result: a reversal to yesterday's gains in the leading U.S. stock indexes, as U.S. stocks declined sharply in morning trading.

The fallout in stocks was not limited to U.S. markets. European and Asian shares also suffered from fears of a slowdown in the takeover market due to higher borrowing costs. More on that from Reuters:
U.S. stocks tumbled on Thursday on signs of further deterioration in the U.S. housing market, a jump in oil prices and a worsening climate for financing corporate takeovers.

The broad Standard & Poor's 500 stock index fell 2 percent at one point, and the steep decline led the New York Stock Exchange to impose trading curbs which restrict large-block sales when a stock was falling.

The slump was worldwide, with overnight equity losses in Asia and the worst drop in European shares in more than four months. U.S. Treasuries rallied, meanwhile, on a flight to safety.

And here's Bloomberg's take:
Stocks tumbled around the world and U.S. Treasuries rallied on concern higher borrowing costs will slow takeovers, spur debt defaults and curb earnings, prompting investors to flee riskier assets.
The Standard & Poor's 500 Index fell to its lowest in almost three months, while Europe's Dow Jones Stoxx 600 Index dropped 2.7 percent, its biggest retreat since March. Benchmark stock indexes in Brazil, Mexico, Argentina, Korea, Poland, Russia and Turkey slid more than 2 percent.
``We're seeing a global repricing of risk as the cost of capital ratchets up,'' said Joseph Quinlan, chief market strategist at Bank of America's investment strategy group in New York. Bank of America's investment-management unit oversees about $566 billion. ``We're working our way through a period of angst and anxiety.''
The interesting thing to note here is that junk bonds and emerging market debt are finally beginning to be priced in a manner that would more accurately reflect their historical risk levels.
Here are two paragraphs from the above linked Bloomberg article that illustrate the recent flight from risky assets:
The cost of the credit-default swaps, used to bet on the ability of companies to repay debt, is the highest in more than two years. The U.S. benchmark CDX Investment Grade Index jumped $6,000 to $62,750, Deutsche Bank AG said.
Emerging-market bonds tumbled, pushing yields over U.S. Treasuries to the widest since September, as investors reduced their holdings of riskier securities. The spread, or extra yield, on emerging-market bonds over U.S. Treasuries widened 15 basis point to 2.1 percentage points at 11:37 a.m. in New York, according to JPMorgan Chase & Co.'s EMBI Plus index. A basis point is 0.01 percentage point. The risk premium is the widest since Sept. 26.
So, we can see that recent worries over the state of the credit markets and the U.S. economy are sending a ripple of fear through the financial markets worldwide.
Short-term worries or lasting effects? Only time will tell, but until then, we'll be here to help you appraise the situation.
With that in mind, here's some more market coverage you might find useful and interesting.
"Rising credit fears rock equity markets" - FT's John Authers comments on the day's market turmoil and cites Jeremy Grantham's opinion of the stock market's slow reaction to credit market problems in this US Daily View video.
"Global Stocks Drop; Investors Shun Risk on Debt Woes" - Bloomberg.
"Goldman Sachs, Bear Stearns Bond Risk Soars, Credit Swaps Show" - Bloomberg.

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