Today is a bad day in the share market all around the world. Australian market lost 7% whilst other markets suffer about the same. US market is not open yet due to a holiday so it will be interesting to see what will happen there.
Anyway, Herald Sun has a good article about this crisis, somewhat a guide if you haven't been following the developments. Here is the article:
Anyway, Herald Sun has a good article about this crisis, somewhat a guide if you haven't been following the developments. Here is the article:
Market meltdown - what you need to know
By Kate Perry, NEWS.com.au money editor
BILLIONS of dollars have been wiped off global share markets since the beginning of the year as investors panic in the face of an economic slowdown.
The hectic selling has been prompted by fears of a US recession – with gurus from global finance powerhouse Goldman Sachs now increasingly confident in forecasting a US recession this year.
If the US does go into recession it will hurt global markets. The cliche about the whole world catching a cold when the US sneezes is grounded in history.
Goldman Sachs has downgraded its economic growth outlook for Australia on the back of its US recession fears. The bank now expects Australia’s economic growth to slow to 3 per cent this year, from earlier forecasts of 3.5 percent, before slowing further to 2.75 per cent next year.
A range of forces have combined to produce the new-year panic on the world markets, but it is chiefly driven by the problems in the US sub-prime market.
What is the sub-prime market?
The first step on the road to recession was the crisis to hit the US mortgage market –or the sub-prime crisis.
During a long property boom US banks and other lenders gave money to may people who had low income or no deposit for a home. They got their loans despite failing to meet ordinary credit criteria.
The US Federal Reserve raised interest rates four times starting in 2006. Over-stretched borrowers fell into arrears, forcing several major US banks to write-off billions of dollars in bad debt.
One American economist estimated that the total cost of the sub-prime crisis, including the write-down in bad debts, falling property prices, and money wiped off the share market could be as much as $US400 billion ($465 billion).
How does the sub-prime crisis affect Australia?
Australian banks and home loan providers borrow money from overseas, including the US. The cost of borrowing that money has gone up following the sub-prime crisis. Australia’s big banks have taken the unusual step of raising home loan rates independently of a move by the Reserve Bank.
The “R” words
Rates and recession are two words that strike fear into the hearts of property and equity investors.
Unemployment is rising, property prices are falling, and Wall Street is plunging. In an effort to stimulate spending George W. Bush is considering pumping up to $US150 billion into the economy.
The US Federal Reserve has also said it would consider dropping interest rates if necessary.
In contrast to the US Federal Reserve, the Australia central bank continues to talk up interest rates. The Reserve Bank last raised rates in November to 6.75 per cent. It next meets on February 5 and while it was recently thought another rate rise was likely, the board will have some serious reflection to do before deciding to inflict another hike on Australians.
One of the RBA’s key tasks is to keep inflation, or the rate of price rises, within a range of 2-3 per cent. Fresh inflation data is due out tomorrow and if the figure is high, a rate hike is more likely because of the handbrake effect that rate rises have on spending.
Yesterday the Rudd government announced a package aimed at getting inflation under control.
Global turmoil
Markets have plunged around the world, with European markets reporting their biggest falls since the September 11, 2001 terrorist attacks. The German DAX index fell 7.2pc overnight, while London’s FTSE was down 5.5 pc.
Wall St was closed yesterday due to the Martin Luther King holiday, but the futures market is pointing to another huge drop when trading resumes today. The Dow Jones futures market is down 4.5 per cent, and the S&P 500 futures market is down 4.7 per cent.: In-depth latest
Original article here.
Goldman Sachs has downgraded its economic growth outlook for Australia on the back of its US recession fears. The bank now expects Australia’s economic growth to slow to 3 per cent this year, from earlier forecasts of 3.5 percent, before slowing further to 2.75 per cent next year.
A range of forces have combined to produce the new-year panic on the world markets, but it is chiefly driven by the problems in the US sub-prime market.
What is the sub-prime market?
The first step on the road to recession was the crisis to hit the US mortgage market –or the sub-prime crisis.
During a long property boom US banks and other lenders gave money to may people who had low income or no deposit for a home. They got their loans despite failing to meet ordinary credit criteria.
The US Federal Reserve raised interest rates four times starting in 2006. Over-stretched borrowers fell into arrears, forcing several major US banks to write-off billions of dollars in bad debt.
One American economist estimated that the total cost of the sub-prime crisis, including the write-down in bad debts, falling property prices, and money wiped off the share market could be as much as $US400 billion ($465 billion).
How does the sub-prime crisis affect Australia?
Australian banks and home loan providers borrow money from overseas, including the US. The cost of borrowing that money has gone up following the sub-prime crisis. Australia’s big banks have taken the unusual step of raising home loan rates independently of a move by the Reserve Bank.
The “R” words
Rates and recession are two words that strike fear into the hearts of property and equity investors.
Unemployment is rising, property prices are falling, and Wall Street is plunging. In an effort to stimulate spending George W. Bush is considering pumping up to $US150 billion into the economy.
The US Federal Reserve has also said it would consider dropping interest rates if necessary.
In contrast to the US Federal Reserve, the Australia central bank continues to talk up interest rates. The Reserve Bank last raised rates in November to 6.75 per cent. It next meets on February 5 and while it was recently thought another rate rise was likely, the board will have some serious reflection to do before deciding to inflict another hike on Australians.
One of the RBA’s key tasks is to keep inflation, or the rate of price rises, within a range of 2-3 per cent. Fresh inflation data is due out tomorrow and if the figure is high, a rate hike is more likely because of the handbrake effect that rate rises have on spending.
Yesterday the Rudd government announced a package aimed at getting inflation under control.
Global turmoil
Markets have plunged around the world, with European markets reporting their biggest falls since the September 11, 2001 terrorist attacks. The German DAX index fell 7.2pc overnight, while London’s FTSE was down 5.5 pc.
Wall St was closed yesterday due to the Martin Luther King holiday, but the futures market is pointing to another huge drop when trading resumes today. The Dow Jones futures market is down 4.5 per cent, and the S&P 500 futures market is down 4.7 per cent.: In-depth latest
Original article here.
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