Fresh banking worries stall markets' rally

THE SURGE in global markets ground to a halt yesterday as concerns resurfaced about the global banking market, while weak economic data added to the gloom.

Despite a positive start to morning trading, many markets dropped into the red in the afternoon after the US market turned sharply downwards on opening.

Reports from the US that plans by Korean Development Bank to take a stake in investment bank Lehman Brothers had stalled spooked investors. Shares in the investment bank fell by more than 30 per cent in early trading and led to a broad sell off in financial stocks.

"We saw a serious shift in direction when the US opened," said one Irish trader. "When the US turned we saw serious selling across the board. Fannie Mae and Freddie Mac plugged a hole but by no means changed the situation. The macro environment remains weak."

Irish stocks had opened brightly as Monday's rally from the bailout of US mortgage banks Fannie Mae and Freddie Mac continued. But any gains were wiped out as concerns about Lehman's caused jitters across the Atlantic.

A steeper-than-expected fall in pending sales of US homes in July and concerns about growth prospects in Europe exacerbated problem.

The bailout of Fannie Mae and Freddie Mac may have triggered the biggest global stock market rally in almost five months but continued housing weakness means that investors should sell into strength, according to a report by Credit Suisse yesterday.

Estimating that US house prices "probably need to fall another 10 per cent to 15 per cent", the report says that it will take approximately two and a half years to absorb the excess housing inventory. De-leveraging has "hardly started" in the US, while Europe and the UK are "close to recession".

Noting that the economies of Europe and the UK are 15 per cent larger than the US, the authors criticise European bankers for not being as proactive as their American counterparts. While markets have responded as if the latest bailout represents a watershed in the credit crisis, the report points out that it is the fourth emergency measure from financial authorities this year. "Previous measures have seen a 6 per cent market rally over the following 8-10 days but clearly previous measures have not been enough."

Credit Suisse pointed to historical evidence which suggests that an equity bottom has not yet been reached, with markets and banks tending to "trough three months to three-and-a-half years after the 'nationalisation' of banks".

Risk appetite and equity sentiment are not nearly as depressed as they were in advance of earlier stock market bounces this year and markets have failed to show the kind of capitulation seen at previous lows, the report says. Shares are "not cheap enough" at present.

David Rosenberg, Merrill Lynch's chief economist, was just as sceptical. Bearish for some time now, Mr Rosenberg noted that 2008 has seen many market advances before "sputtering and heading back to new lows".