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New York rally ends turbulent day New York rally ends turbulent day
(about 5 hours later)
The world's markets were subject to another day of chaos on Thursday, with London's main FTSE 100 index seeing its sharpest fall in four-and-a-half years.The world's markets were subject to another day of chaos on Thursday, with London's main FTSE 100 index seeing its sharpest fall in four-and-a-half years.
The FTSE 100 slumped 4.1%, or 250 points, to end at 5,859, with sharp losses echoed across Europe and Asia.The FTSE 100 slumped 4.1%, or 250 points, to end at 5,859, with sharp losses echoed across Europe and Asia.
But hours before the closing bell in New York, shares on Wall Street staged a dramatic recovery after suffering heavy losses earlier in the day.But hours before the closing bell in New York, shares on Wall Street staged a dramatic recovery after suffering heavy losses earlier in the day.
The main Dow Jones index closed down 0.12%, or 15.7 points, at 12,845.8. New York's Dow Jones index closed down 0.12%, or 15.7 points, at 12,845.8.
Concern over the impact of turmoil in the US sub-prime lending market continued to haunt investors, causing the FTSE's biggest one-day percentage fall since March 2003. Fears that the turmoil in the US sub-prime lending market will hit banks and snowball into serious economic problems deepened after the biggest US lender, Countrywide Financial said it was tapping an entire $11.5bn (£5.8bn) credit facility to help it conduct its day-to-day business.
The falls came despite the Federal Reserve pumping an extra $17bn (£8.6bn) into the US banking system. The problems in the sub-prime mortgage market will linger on for a while Bart IngelsFortis Bank analyst
Central banks have been taking such action to try to restore confidence and avoid a credit squeeze. Earlier in the week, Countrywide said that mortgage delinquencies had risen in July to five-year highs.
Deteriorating conditions
The deteriorating conditions at the company, which provides home loans to one in five US homeowners, was a huge blow to investor confidence in risky assets, such as shares, which as been gradually chipped away by the unrelenting slump in the US housing sector.
As US interest rates have risen and the housing bubble has burst, a growing number of borrowers who are either on low incomes or have patchy credit ratings have defaulted on their loans.
The crisis in this section of the mortgage market, known as sub-prime, has led to extensive financial difficulties for a number of investment funds with heavy exposure to the once lucrative sector and triggered fears of a wider financial crisis.
A government report that showed construction of new homes in the US in July sliding to 10-year lows and news that investment banking giant Bear Stearns will chop 240 jobs at its sub-prime division, worsened the mood.
Even further intervention by the Federal Reserve, which pumped an extra $17bn (£8.6bn) into the US banking system on Thursday to try and restore confidence seemed unable to allay concerns that the problems in the financial markets was a portent of what lay in store for the wider economy.
How the markets fared London's FTSE 100: down 4.1% to 5,859 New York's Dow Jones: down 0.1% to 12,845.8Frankfurt's Dax: down 2.4% to 7,270Tokyo's Nikkei 225: down 1.99% to 16,148.49
Over the past week, the Fed has now injected $88bn (£44.3bn), while the European Central Bank has put up 211bn euros ($283.2bn; £142.6bn).Over the past week, the Fed has now injected $88bn (£44.3bn), while the European Central Bank has put up 211bn euros ($283.2bn; £142.6bn).
Unknown scale Lingering uncertainty
However, investors appear to remain unconvinced that the action of the central banks will be enough, and more than £100bn has now been wiped off the value of the UK's leading shares alone since last Wednesday. But the action of the central banks has been largely dismissed and tens of billions of pounds has now been wiped off the value of the UK's leading shares alone since last Wednesday, with financial and mining stocks the worst off.
The problems in the sub-prime mortgage market will linger on for a while Bart IngelsFortis Bank analyst Q&A: World stock market falls What's causing credit crunch? Peston's Picks: Where's the risk?
In Europe, Germany's Dax ended down 2.4% to 7,270 and France's Cac lost 3.3% to 5,265.In Europe, Germany's Dax ended down 2.4% to 7,270 and France's Cac lost 3.3% to 5,265.
The recent financial market volatility has been triggered by the US sub-prime mortgage sector, which offers higher-risk loans to people with a poor credit history. Earlier, Asian stocks were also battered, with Japan's Nikkei, Hong Kong's Hang Seng and the South Korean Kospi all caving in to the sharp aversion to risk that has marked the recent turmoil.
As US interest rates have risen and the housing bubble has burst, a growing number of sub-prime borrowers have defaulted on their loans. But in the US, the broader S&P index closed in positive territory, up 1.37% at 1,426.25 after retreating during the trading session, while the technology-dominated Nasdaq also recovered, but ended down 1% at 1846.09.
This has led to extensive financial difficulties for a number of investment funds with heavy exposure to the sector - and triggered fears of a wider financial crisis. The upbeat finish was driven by optimism that two of America's biggest mortgage lenders, Fannie Mae and Freddie Mac could get the green light by the regulator to increase the size of their home loan books by a greater level than they are currently allowed.
While some estimates say $300bn in loans could be at risk, one of the biggest worries for investors is not knowing the eventual scale of the problem. This would offer more options for people to get access to cheap mortgages and inject liquidity into the system at a time when a growing number of lenders are closing or scaling back their sub-prime operations.
"The problems in the sub-prime mortgage market will linger on for a while," said Bart Ingels, an analyst at Fortis Bank, in Brussels. Fannie Mae and Freddie Mac had their operations curtailed after both were embroiled in accounting scandals a few years ago, but growing political pressure in Washington could see these restrictions lifted to prevent the credit outlook from worsening.
"Some days it was a little bit better but then negative news came to the fore, and it will go on like that for a while." "The problems in the sub-prime mortgage market will linger on for a while," said Bart Ingels, an analyst at Fortis Bank in Brussels.