World stocks slumped today amid reports of more damage from the teetering US subprime mortgage sector and falling US house prices.
European shares snapped a seven-day rally to end lower after a series of newspaper reports suggested some investment houses, including Barclays, faced millions of dollars in exposure to asset-backed securities, stoking more uncertainty over the spread of the crisis in the US mortgage sector.
Bank shares led European stocks lower for most of the day, with BNP Paribas losing 3.4 per cent, Barclays dropping 3.6 per cent and HSBC falling 1.9 per cent. The FTSEurofirst 300 index of top European shares ended down 1.7 per cent at 1,490.25 points, having erased almost all of this year's gains, but was still about 4 per cent above the eight-month lows struck on August 17th.
In Dublin the Iseq closed down 217.47 points at 8195.59, representing a fall of 2.58 per cent. London's FTSE closed down 1.9 per cent at 6102.2.
US stocks slid sharply after Merrill Lynch cut its rating on three investment banks, while housing and consumer confidence data added to doubts about the US economy's health.
Merrill Lynch downgraded Bear Stearns Cos, Lehman Brothers and Citigroup to "neutral" from "buy" and lowered estimates for the banks' earnings due to turbulence in the debt markets, slowing takeover activity and upheaval in the mortgage sector.
Merrill's move comes a day after Goldman Sachs slashed its earnings forecast for Bear Stearns, Lehman Brothers and Morgan Stanley.
The Dow Jones industrial average was down 147.78 points, or 1.11 per cent, at 13,174.35. The Standard & Poor's 500 Index was down 17.46 points, or 1.19 per cent, at 1,449.33. The Nasdaq Composite Index was down 31.98 points, or 1.25 per cent, at 2,529.27.
A report from S&P/Case-Shiller showed house prices across the US declined by 3.2 per cent in the second quarter compared with the same period last year. It was their worst decline in 20 years.
Reflecting concern that the fallout from the subprime debacle is spreading, shares of State Street Corp, the world's biggest institutional money manager, fell as much as 4 per cent on worries about the company's $20 billion plus in commitments to asset-backed commercial paper programs.
Meanwhile, British bank Barclays Plc denied the report today that it has several hundred million dollars of exposure to failed debt vehicles structured by its investment banking arm.
The European Central Bank, Bank of Japan and Bank of Canada all said market turmoil could affect their decisions on monetary policy. US Federal Reserve Chairman Ben Bernanke will take the spotlight on Friday when he gives a speech on housing and monetary policy.
Investors are becoming increasingly confident that the Federal Reserve will cut interest rates at its next meeting in September, and that other central banks, including the ECB and BOJ, will abandon plans to raise rates in the near term.
ECB President Jean-Claude Trichet cast fresh doubt on the chances of a euro zone rate rise next week. His last comments on monetary policy made on August 2nd, when he used the "strong vigilance" phrase signaling tightening was likely, were made before the current market volatility, he noted yesterday.
Germany has so far borne the brunt of the European fallout from problems stemming from subprime US home loans, as two of its banks have almost collapsed, requiring major bailouts.