LONDON (AFP) – World stock markets struggled on Wednesday after sharp losses driven by the unfolding US financial crisis and before more testimony from US Federal Reserve chief Ben Bernanke.
Bernanke warned of economic gloom on Tuesday and his next comments are awaited anxiously by investors, reeling from the collapse of US bank IndyMac and a rescue for US mortgage-financing firms Fannie Mae and Freddie Mac.
Markets are worried that the deep strains in US finance could spread overseas since foreign investors have large exposure to American home loans, dealers said.
“Goaded by bearish analysts, investors seem to be abandoning American banks in droves,” the New York Times reported on Wednesday.
“While a fraction of the nation’s banks are expected to buckle under their growing burden of bad loans, federal regulators, bank executives and analysts agree that the vast majority of institutions are sound.”
In Europe on Wednesday, London shares fell by 0.27 percent after slumping on Tuesday to the lowest close since October 2005. Elsewhere, Paris shed 0.17 percent, while Frankfurt gained a marginal 0.03 percent.
In Asia the picture was also subdued as some investors hunted for bargains amid easing oil prices. Tokyo gained 0.05 percent and Hong Kong ended 0.23 percent higher while Shanghai was down 2.39 percent at the midday stage.
Regarding Bernanke, investors will be “looking for clues and directions in terms of where the US economy might be heading over the next six months, and whether this potential threat of recession is something that they can overcome,” said Hargreaves Lansdown analyst Richard Hunter.
“That clearly is going to have an impact in all sort of different ways for other global markets.”
“The market will still be digesting the comments that he (Bernanke) made yesterday which were obviously extremely cautious,” Hunter added.
Wall Street had finished mainly lower on Tuesday as the leading Dow Jones Industrial Average slumped to a two-year nadir on mounting concern over US financial institutions.
Bernanke was set to appear on Wednesday in the House of Representatives for a second day of testimony on the US central bank’s semiannual economic report.
“The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities,” Bernanke had said on Tuesday.
The Fed report lifted its 2008 outlook for the US economy in a forecast that appears to show no recession. But Bernanke warned of numerous risks including a potentially troublesome rise in inflation and strained credit markets.
Investors across the globe remain on edge over the possibility of a recession — two or more quarters of negative economic growth — in the United States.
“The balance is again tipping towards fears of recession given that the speech by Ben Bernanke to Congress confirmed the particularly marked uncertainty weighing on the economy and persistent uncertainty about inflation,” said Valerie Plagnol, the joint head of strategy at Credit Mutuel CIC.
But US President George W. Bush had expressed confidence on Tuesday that the country would emerge “stronger than ever before” from the current malaise.
In Asian stock markets on Wednesday, Sydney rallied 1.14 percent, while Tapei shed 1.81 percent and Manila closed 1.6 percent lower.
Some analysts argued that the United States could be facing the biggest financial shock since the Great Depression.
“This is by far the worst financial crisis since the Great Depression,” said Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University’s Stern School of Business.
“Hundreds of small banks with massive exposure to real estate will go bust,” he predicted.
“Dozens of large regional/national banks (a la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust,” he added.
However, Hargreaves Landown’s Richard Hunter said that comparisons with the Great Depression were short of the mark.
“There is no question that there is an economic slowdown which we are well in the middle of at the moment, but I think any Great Depression-type comparisons are probably over-egging it at this stage,” Hunter said.