Threat of US recession hits global markets

The threat of an imminent US recession cast a pall over global stock markets yesterday, sending European shares to their lowest point in 16 months, and triggering a choppy day on the Iseq index of Irish equities.

Fears that the US economy might slide into recession - or the conviction among some analysts that it has already done so - continued to cloud investor sentiment, sending the share prices of financial stocks and major oil companies lower.

Comments by European Central Bank council member Yves Mersch that the bank should exercise caution as risks to economic growth mount, prompted investors to bet the ECB is shifting its stance toward a cut in interest rates, sending the euro lower.

In a bleak morning session, the Iseq was trading down 2.6 per cent, but managed to close down just 10 points, or 0.16 per cent lower than the previous day.

However, the Iseq remains 6.6 per cent down for the year so far.

The impact a recession would have on demand for oil saw crude oil prices dipping below $90 a barrel at one point.

That provided a reprieve for Ryanair, which saw its share price rise 1.8 per cent. Anglo Irish Bank was the hardest hit of the Irish financials and its share price finished down 3 per cent.

In a busy week for the besieged US banking sector, it was the turn of the US's third and fifth-largest banks - JP Morgan Chase and Wells Fargo - to declare their damage from the collapse of the sub-prime mortgage market yesterday, after the US's largest bank, Citigroup, announced a $18 billion write-down on Tuesday. JP Morgan said its profits dropped 34 per cent in the fourth quarter of 2007, while Wells Fargo reported a 38 per cent fall in income but both performances were better than analysts had predicted.

JP Morgan's smaller than expected $1.3 billion sub-prime write-down was described as "peanuts" compared to Citigroup's losses by one trader.

The biggest US brokerage, Merrill Lynch, is expected to report record losses of more than $3 billion today after writing down the value of mortgage-related securities, while more negative news is also due from Bank of America.

Investors are now hoping that, after the current season of mark-downs, most of the losses from the sub-prime market will have been identified.

This would give investors the courage to return to equity markets and banks the confidence to lend to each other once again.

But Goodbody Stockbrokers banking analyst Eamonn Hughes warned yesterday that there would be no immediate return to fortune for banks, despite an easing of wholesale funding rates and slackening demand for fund injections from central banks.

"It is clear that the market still remains uncomfortable with the banks, notwithstanding the progress being made in plugging holes created by write-downs," Mr Hughes said.

Earnings for Irish banks will be "essentially flat" next year, he warned.

"As we emerge from this season of write-downs, it is becoming clear that banks are looking at pedestrian revenues and a rising credit charge."