Subprime worries to spur more volatility
NEW YORK (Reuters) - More signs of weakness in the mortgage market, another surge in oil prices and a Federal Reserve rate decision could create more turbulence for Wall Street next week.
Widening fallout from the U.S. housing slump has rattled credit markets, putting investors on edge about the outlook for corporate takeovers and share buybacks -- two catalysts of the market's recent rally to record highs.
On Friday, Standard & Poor's cut its ratings outlook on the debt of investment bank Bear Stearns Cos.BSC.N, fanning concern that troubles in the subprime mortgage market are spreading, which could threaten the economy's health.
The ratings agency's move came as American Home Mortgage Investment Corp. AHM.N, a subprime mortgage lender, announced plans to close most of its operations, joining a growing list of casualties hit by the stalled housing market.
"The market is really struggling with defining the size of the subprime problem. The market does not like uncertainty," said Jim Fehrenbach, head of Nasdaq trading at Piper Jaffray, in Minneapolis.
Investors will tune in to what the Federal Reserve says in its assessment of the economy's outlook on Tuesday, when it releases its policy decision on interest rates.
The Federal Open Market Committee, the Fed's policy-setting body, is widely expected to keep rates unchanged, so investors will be focused on the central bank's assessment of risk, especially regarding troubles in the subprime market, and following the government's report on Friday that showed job growth slowing. The FOMC statement is expected at about 2:15 p.m. (1815 GMT).
The Fed has held the fed funds rate for overnight bank loans steady at 5.25 percent since June 2006.
WHEN THE BEAR GROWLS
The toll from housing is hurting the financial sector, with the S&P financial index .GSPF now down 12.7 percent year to date, as investors fret about likely losses tied to rising delinquencies on subprime mortgages.
"There's more to come with the credit problems. You're going to get a ripple effect," said Alan Lancz, president of Alan B. Lancz & Associates Inc., an investment advisory firm, in Toledo, Ohio.
"It's not just subprime. It affects a lot more -- anything from the economic numbers to investor psychology to the wealth effect as equity prices move down."
On Friday, an escalation of credit worries spurred by more news about Bear Stearns' exposure to the subprime mortgage market sparked a sharp sell-off in stocks. By Friday's closing bell, the Standard & Poor's 500 index and the Nasdaq had suffered their worst one-day percentage losses since the February 27 slide in global stock markets, which was triggered by a steep drop in China's benchmark share index.
Bear Stearns' chief financial officer said bond market woes that are driving investors away from risk may be a worse problem than the 1987 stock market crash.
The Dow Jones industrial average .DJI sank 281.42 points, or 2.09 percent, to end on Friday at 13,181.91. The Standard & Poor's 500 Index .SPX slid 39.14 points, or 2.66 percent, to 1,433.06. The Nasdaq Composite Index .IXIC tumbled 64.73 points, or 2.51 percent, to 2,511.25. Continued...
