Subprime meltdown!

Written by Markets Bureau | Agencies | Mumbai, Aug 1 | Updated: Aug 2 2007, 06:30am hrs
Equities around the world continued to reel under severe selling pressure as worries about a deteriorating credit market in the US resurfaced following an announcement by American Home Mortgage Investment Corp that it may have to liquidate its assets. Amid the credit turmoil, Bear Stearns, the manager of two hedge funds that collapsed last month, blocked investors from pulling money out of a third fund.

Indian stocks suffered their biggest fall in four months, by 3.96%, on concerns that the US subprime loan problems will worsen, reducing global demand for riskier assets. Indian markets opened in the negative zone due to all-round weak global cues, influenced by US and much weaker Asian markets, and kept declining further on intense selling pressure and margin calls. Weak European markets dampened the sentiment further.

The BSEs 30-share Sensex slumped below the psychological 15,000-mark and the NSEs Nifty fell below 4,400. All sectoral indices on the BSE tumbled with shares from the real estate pack suffering the most.

The Sensex dropped 615.22 points, or 4%, to 14,935.77, its biggest slide since April 2. All 30 index constituents declined. The index, which hit a record high of 15,868.85 last week, is still up 8.3% in 2007. The S&P/CNX Nifty lost 183 points, or 4%, to 4,345.85. Nifty futures for August delivery slid 4.6% to 4,301.05.

Asian markets were rattledmany fell more than 3%following overnight losses on the Dow Jones and other major US indices, and after Australia's Macquarie Bank said retail investors faced losses of up to a quarter in two of its high-yielding bond funds. The Dow Jones Industrial Average slid 146.32 points, or 1.10%, to close at 13,211.99. The S&P 500 index fell 18.64 points, or 1.26%, to 1,455.27 points.

In Asia, the Taiwan Weighted was the biggest loser, down 4.26% or 395.37 points at 8,891.88 points, followed by the BSE Sensex. The Nikkei 225 lost 377.91 points, or 2.19%, at 16,870.98 points, while the Hang Seng was down 3.15%, or 729.58 points, at 22,455.36 points. The Japanese yen strengthened further to touch a three-month high against the US dollar, spreading fears of another unwinding of yen carry trade.

Mihir Vora, head of equities at HSBC AMC, said, Global concerns are hurting our markets. We may see money flows and liquidity impacted if investors are forced to unwind leveraged positions.

Stocks also fell after crude oil topped $78 a barrel in New York, closing at a record. Crude oil for September delivery was at $77.65 a barrel in after-hours electronic trading on the New York Mercantile Exchange.

Yesterday, the contract rose $1.38, or 1.8%, to $78.21, the highest close since trading began in 1983. India is Asias third-largest oil importer.

Foreign investors sold a net $336.6 million in equities on July 27 and July 30, according to latest Securities & Exchange Board of India figures. They were net buyers on every day in July, except three. Reliance, owner of the worlds third-biggest oil refinery, lost Rs 94.3, or 5%, to Rs 1,798. ICICI Bank Ltd, the nations second-largest lender, fell Rs 35.7, or 3.9%, to Rs 891.35. The two stocks account for about a fifth of the Sensexs weight.

Seshadri Bharathan, director, stock broking, Dawnay Day AV Securities, said, Indian markets collapsed today mainly due to the subprime market meltdown after a US mortgage lender said it had no cash to pay its creditors, and a leading US hedge fund warned their funds may post losses. This hedge fund blocked redemptions in a third hedge fund after two of its funds went bust last month. A leading Australian hedge fund fell the most in five years after saying investors in some of its funds may lose as much as 25% of their money.

Banks such as ICICI Bank and HDFC Bank fell more than 3%, while mortgage lender Housing Development Finance Corp lost 3.8%. Cement company ACC Ltd fell 8.9%, the biggest percentage fall on the main index, and Reliance Energy lost 7.1%. In the broader market, losers outpaced gainers by more than four times on volumes of 294.5 million shares.

What is subprime lending

Subprime lendingalso called B-paper, near-prime or second-chance lendingrefers to loans to borrowers who do not qualify for market interest rates because of poor credit history. Subprime borrowers typically have histories of payment delinquencies, charge-offs, or bankruptcies.