World markets shaken and stirred

Down Down Under: Australia didn't fare any better. The All Ordinaries Index in Sydney details the steep drop in the value of the market there in early trade today in reaction to the plunge in U.S. and European markets. Midday the benchmark S&P/ASX 200 was down 174 points or 2.8 percent at 5,991.6. The broader All Ordinaries Index was down 173.4 points or 2.8 percent at 6,104.3.

TEXT OF INTERVIEW

Scott Jagow: To say the world stock markets are rattled is an understatement. Fallout from the US subprime market is reaching around the globe. One analyst in London calls it an "all-around sense of panic." For the second straight day, European stocks are down a good 2 percent.Japan's Nikkei fell 400 points today, also about 2 percent. We're joined by our European correspondent Stephen Beard. Stephen, what's the mood like in London this morning?

Stephen Beard: Pretty worried I would say. I mean all the big European stock markets opened sharply lower. Bank shares were a particular casualty. So there is undoubtedly a growing fear that a credit crunch I son its way and that clearly would be very bad for stock markets.

Jagow: And it sounds like liquidity is the big issue right now. Access to cash.

Beard: Yes. Because banks have been securitizing their loans, because they found this clever way of spreading the risk by lending money and then parceling those loans up into securities and selling them on, they've been able to lend a great deal more money than usual. However, because some of the, originally the subprime mortgage loans, turned soured, investors increasingly don't want to by these securitized loans.

Jagow: I was struck by what the European Central Bank did yesterday, pumping $130 billion into the banking system. How unusual is that?

Beard: Very unusual, the most it has at a single go pumped into the banking system, more even than after 9/11. And other central banks followed suite, not quite on the same scale. I mean the Fed pumped in $24 billion yesterday and the Bank of Japan pumped in around $8 billion. So this is undoubtedly a global problem.

Jagow: Well certainly Stephen over the last month we've had a lot of volatility and each day people seem to be indicating 'oh the markets are going to hang in there.' Today is there a different sense that this really could fall apart at the seams?

Beard: Well the argument is still raging. The optimists say that this is a market phenomenon, it'll be confined to the stock markets and the bond markets. Pessimists, however, say we're getting into dangerous territory here because banks are involved and if banks lose a great deal of money they'll become evermore reluctant to lend and that will hit economic growth.

Jagow: All right Stephen Beard in London, thanks.

Beard: OK Scott.

Jagow: Here's the ugliness from Wall Street yesterday: The Dow and the S&P 500 sank nearly 3 percent. The Dow fell 387 points to 13,270. The S&P 500 was down 44 points. The NASDAQ lost 56. I mentioned Japan's Nikkei, overall the Asian markets dropped almost 4 percent today.

Jagow: We turn now to market strategist Joe Battipaglia. Joe, can you explain to me how problems in the U.S. subprime market are causing investors all over the world to panic like this?

Joe Battipaglia: The U.S. mortgage market totals $10.4 trillion. Of that amount, $2.6 trillion belongs in the subprime and what's called the Alt-A category. So what you've created then is a $2.6 trillion mortgage market that then was repackaged as investments for investors around the world and it all rested on the notion that home prices would continue to move up, b) that interest rates wouldn't change all that wildly and 3) the underlying borrower of the original mortgage would be able to make the payments.

Jagow: Well beyond the global sell-off, what evidence is there that this is not just a stock market correction or a big correction and that it is spilling into the economy?

Battipaglia: Well let's start with the consumer. We have seen the sell rate in automobiles decline. We have seen retail sales generally drop by 50 percent from the run rate they were running a year ago. And the other evidence you need about a spillover is the fact that the European Central Banks yesterday had an injection into their financial system of over $200 billion euros which was the biggest one-day intervention that the ECB has ever had to engineer.

Jagow: OK so we have the central banks putting all this money into the banking system, we have investors panicking and selling. The Fed did not raise interest rates this week and didn't really indicate that it would any time soon. Joe, what do we do now?

Battipaglia: Keep your money available to make investments as the market bottoms out and in that area, when the noise gets the loudest is probably the time to start nibbling away because the global economy does have expansion characteristics. Fears tend to come and go, we've seen it in the past and this is no different, but eventually it will happen. And so the U.S. growth rate will be retarded back below 2 percent, stock prices will come down accordingly to reflect that concern and then we restart the cycle at the other side.

Jagow: All right Joe, thanks for joining us.

Battipaglia: I hope that helped.

Jagow: Joe Battipaglia is with Stifel Nicolaus, a financial company based in St. Louis. By the way I meant CUT interest rates, not raise them.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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