Wall Street renewed its downward slide on Wednesday, dipping below 12,000 as investor confidence continued to be hit by the crisis in the US subprime mortgage market.
Wall Street initially flirted in and out of positive territory but later later slumped as trading continued. Shortly after midday on Wall Street, the S&P 500 index was trading 0.35 per cent down at 1,373.17 while the Dow Jones Industrial Average was 76.10 points lower at 11,999.86.
VIDEO Markets editor Chris Brown-Humes on fresh equity markets selling following the concerns over US subprime
The falls came after an earlier rout of European and Asian equities. In Asia, the sell-off was broad and deep on investors’ worries that the subprime mortgage problems could hit the US housing market and the broader US economy – a big export market for many of the region’s companies.
The Tokyo stock market plunged 2.9 per cent, Singapore by 3.3 per cent, Mumbai dropped 3.5 per cent, Hong Kong by 2.5 per cent and Shanghai by 1.9 per cent.
In Europe, heavy falls were also seen as rattled investors offloaded stocks By late afternoon in London, the FTSE Eurofirst 300 index was down 2.24 per cent while the FTSE 100 index in the UK had slumped 2.17 per cent.
Elsewhere, the Xetra Dax index lost 2.3 per cent in Germany, the CAC-40 index by 2.1 per cent in Paris and the Swiss market fell by 2.6 per cent.
On government bond markets, US Treasuries firmed after early weakness on safe haven buying by investor. The yield on the 10-year US Treasury fell 1 basis point to 4.481 per cent.
Credit markets were generally weaker. The iTraxx Crossover index, a basket of credit default swaps on mainly junk-rated European corporate bonds, recovered some of its losses early on Wednesday afternoon. The Crossover, which tracks the 45 most-liquid names, was trading around 235 basis points, about 7bp tighter than the early morning opening price.
The yen lost ground on Wednesday after a sharp rally in the previous session as US equities tumbled. Analysts said the consequent rise in risk aversion on Tuesday benefited the Japanese currency as investors unwound carry trades, in which the purchase of riskier high-yielding assets is funded by selling the yen.
However, as the sell-off in US equities slowed, the yen gave back some of its gains, falling 0.4 per cent to Y116.60 against the dollar, losing 0.3 per cent to Y153.73 against the euro and dropping 0.2 per cent to Y224.60 against sterling.
Meanwhile, the high-yielding Australian and New Zealand dollars, which were particularly hard hit on Tuesday, rallied more strongly against the yen, rising 0.9 per cent to Y91.30 and gaining 0.7 per cent to Y80.20 respectively.
Julian Jessop, chief international economist at Capital Economics, said although the full extent of the problem was not clear, at the very least, the sub-prime crisis can be expected to worsen the downturn in the US housing market.
“We think it is right to be concerned, particularly about the knock-on effect on US consumer spending. Moreover, the US sub-prime mortgage market is yet another example of the financial excesses and extraordinarily high degree of risk appetite that have supported a wide range of asset prices in recent years,” he said.
David Rosenberg, North American economist at Merrill Lynch, said the direct macroeconomic effects of sub-prime stress were likely to be fairly small. But he was concerned about the knock-on effects from the pullback that the US was most certainly going to see in mortgage credit availability.
“Even if the pullback is only aimed at the sub-prime market, there could well be potentially significant further drags on home prices, construction activity and of course consumer spending growth via the reduced wealth effect,” he said.
“It is not inconceivable (given what is happening now to mortgage originations) that we end up with something closer to a 10 per cent decline in home prices this year. This would shave a further 0.5 percentage points off GDP growth via the wealth effect, which means GDP growth this year comes in around 1¾ per cent, closer to 1½ per cent by the end of the year; and the unemployment rate goes back above 5 per cent by the end of 2007 from 4.5 per cent right now. “
“That’s not a classical recession, but it’s what we call a growth recession, and an old rule of thumb says that anything lower than 2 per cent GDP growth generally spells a weak credit environment.”
New York Stock Exchange. 
Just two weeks after China sent global markets into a tumble, growing worries about sub-prime mortgage lenders in the United States are sending jitters through stock exchanges around the globe. The three major US stock market indices each fell two percent from Monday's closing price, marking the second-biggest loss of 2007. London's FTSE 100, Paris' CAC 40 and Frankfurt's DAX 30 indices each closed down more than 1 percent.

As the Mortgage Bankers Association reported that late payments on mortgages and home foreclosures in the US homes rose in the fourth quarter to their highest level in years, investors are concerned that not only US banks but also multi-national banks around the globe could have exposure.

More than two dozen sub-prime lenders have closed or sold operations as defaults on those mortgages have risen. "The delinquencies and defaults have started to soar," said Nicolas Retsinas, director of Housing Studies at Harvard University. "A lot of these lenders started to make loans and lost track of some of the fundamentals." 

New Century Financial Corporation, the second largest sub-prime lender in the US, has recently revealed that its creditors were no longer providing funds and, further, it has become subject of an SEC investigation. The New York Stock Exchange has said it will delist New Century. Accredited Home Loan Lending, another major sub-prime mortgage specialist, said it was seeking fresh capital and waivers on its lending covenants.

Sub-prime lenders provide mortgages to people who do not qualify for loans from mainstream lenders, typically due to their credit histories. The lenders then bundle these mortgages as collateral for loans that they obtain from other financing firms, such as GMAC. Such firms can then repackage these loans and sell them as mortgage-backed securities. These securities may end up in the hands of major multi-national banks such as Citibank, HSBC, and Commerzbank. Each level of lending assumes a level of financial risk, but trouble can arise when the risk tolerances are exceeded. If too many homeowners default on their mortgages, the sub-prime lender can end up defaulting. If too many of these lenders default, as it is feared may be happening now, the defaults can cascade upward. While no one is predicting major bank failures at this point, it is feared that their profits could be hurt.