20 August 2007

Traders braced for another torrid week

By Ambrose Evans-Pritchard and Yvette Essen
Last Updated: 12:47am BST 20/08/2007

Switzerland's top banker has warned of massive losses from the unfolding credit crisis, describing the collapse in US lending standards as "unbelievable".

Comment: Bernard Connolly on the sub-prime crisis

All eyes will be on Tokyo today to learn if the US rate move helps restore confidence

Jean-Pierre Roth, president of the Swiss National Bank, said market turmoil was far from over as tremors from the sub-prime debacle continued to rock the world.

"We're certainly not at the end of the story. There are question marks surrounding the development of the American economy," he said. "Something unbelievable happened. People who had neither income nor capital got credit with very attractive conditions. Now reality is striking back," he said.

In Germany, the state bank SachsenLB admitted that it had received a €17.3bn bail-out after its investment arm Ormond Quai racked up huge losses on US sub-prime debt. It had previously denied holding direct exposure to sub-prime.

The revelation came as traders braced themselves for another turbulent week, with mounting expectations that central banks may soon cut rates to prevent market mayhem leading to an economic downturn.

While the surprise half-point cut in the US discount rate to 5.75pc last Friday helped settle markets and launch a relief rally on Wall Street and European bourses, investors remain wary until it becomes clearer who is holding the main losses on US mortgage debt.


Stockmarket historian David Schwartz warned investors not be fooled by signs of recovery. "The truth is no-one knows how serious the financial problem in the US is, nor how it will unfold. We do know central banks are scared out of their minds," he said.

The scale of last week's sell-off sent shock waves through almost every asset class. Hedge funds liquidated yen "carry trade" positions to meet margin calls, toppling dominoes across Asia, Latin America, and Eastern Europe.

All eyes will be on Tokyo this morning to learn whether the US rate move proves enough to restore confidence after the Nikkei index slid 5.4pc on Friday. The shares of Japanese exporters have crashed on profit fears following the yen surge.

Both Goldman Sachs and Lehman Brothers predict two cuts in the US federal funds rate to 4.75pc by the end of the year as falling house prices dampen spending. Michigan's consumer confidence index slumped to 83.3 in August, down from 90.4 in July.

Markets are pricing in a 34pc chance that the European Central Bank will have to start cutting rates before the end of the year after growth faltered in the second quarter. The French and Spanish property booms have both stalled.

Jean Claude-Trichet, the ECB's president, last week reaffirmed a likely quarter point rate rise to 4.25pc in September, despite the bank's emergency actions in previous days.

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