Fears of a meltdown in the US mortgage market are likely to stoke further falls in the value of equities this week, with billions of pounds expected to be wiped from company values around the world.
Three of Wall Street's biggest investment banks, Merrill Lynch, Citigroup and JPMorgan, will all post second-quarter earnings with new writedowns likely to exacerbate market jitters. But it's the fate of the American mortgage giants, Freddie Mac and Fannie Mae, which halved in value in two days at the end of last week, that will dominate proceedings at tomorrow's opening bell. A further slump in value is likely to see renewed calls for a Northern Rock-style rescue of the pair, which guarantee loans worth more than $12,000bn.
On Friday, the US Treasury Secretary, Hank Paulson, sought to allay fears that a bailout would be needed, saying: "Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission. We are maintaining a dialogue with regulators and with the companies."
Britain's FTSE index of leading shares was caught up in America's slide last week, shedding more than 2 per cent of its value on Friday, nudging the market into official bear territory – the 19th since records began in 1918. The value of the UK's biggest 100 companies fell on Friday to its lowest for two and a half years. It dropped 2.7 per cent to 5,261.6, with the relative strength of the mining and energy sectors the only factor keeping the index above 5,000.
After a torrid week for Britain's blue-chip companies, led by the building industry, where thousands of jobs were lost and fears that 60,000 more could go over the coming months, further bad news is expected. Figures from accountants Ernst & Young released today show there were 98 profit warnings issued in the UK by listed companies in the second quarter of the year – the worst figures since 2001.
"These are uncertain and challenging times for UK plc," said Keith McGregor, restructuring partner at Ernst & Young. "Mistrust and trepidation have spread. Raising capital is perilous and equity markets are demanding unprecedented reassurance, especially from the leveraged and those exposed to home construction or the consumer."
On Tuesday, the Bank of England's Governor, Mervyn King, will have to write a third letter to the Chancellor, Alistair Darling, explaining why the inflation rate continues to sit above the 2 per cent target. This will follow the release of the June consumer price index figures.
Meanwhile the price of oil continued to reach new levels on Friday, breaching $147 a barrel. The jump, fuelled by concerns about Iranian crude production, comes just days ahead of a Treasury Select Committee hearing into oil price speculation.Reuse content