To see the extent of how the world markets are all inter-connected, the various bourses in the Far East are reacting negatively this morning to the sharp overnight drop on Wall Street.
Yesterday, the Dow industrials tumbled 312 points on signs of further weakness in the housing market and deteriorating conditions for corporate buyouts. The S&P lost about US$300 billion (RM1.04 trillion) in market value in its worst single session since the global market sell-off on 27 Feb 2007.
Especially affected were financial shares that took a beating on growing evidence that problems in the sub-prime mortgage market are spreading, making financing the corporate buyouts more difficult.
Just earlier this week, there were reports that the sub-prime mortgage market in the United States would likely suffer further setbacks in the coming months. In a tightening of the lending standards by US banks, the interest rates of as much as US$500 billion of risky home loans sold at the height of the high-risk lending boom in 2005 and 2006 are expected to be reset at much higher levels.As a result, investors may be forced to sell off their holdings. Potentially, hundreds of hedge funds and proprietary desks face serious losses are at risk because they have used leverage.
A professor at MIT’s Sloane School of Management, Andrew Lo, said it would be difficult for investors to gauge how much further prices could fall. He expects a massive sell-off by institutional investors which will spark off a spiral of losses.
So what was experienced overnight in Wall Street is already sending ripples around the world. Asia is showing that we are not immune when that happens. But is this a short-term, knee-jerk reaction as many would like to believe, or is this the harbinger of longer-term turbulence? Remember what I mentioned a few months ago about America’s old sneeze? It may really catch on here.
It may well be time to take some profit and watch from the side-lines.