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NEW YORK - Reports of more damage from the teetering United States subprime mortgage sector hit global stock markets yesterday as central banks around the world said their outlooks for monetary policy had been thrown into doubt.
Speculation that more financial institutions face problems, evidence that German confidence has been weakened and data showing US house prices slid by the most in at least two decades in the second quarter all quashed any hopes that the home loan crisis was easing.
US stock indexes tumbled more than 2 per cent overnight on Tuesday after Merrill Lynch warned that ailing credit markets will hurt bank profits.
The Dow Jones industrial average skidded 280.28 points, or 2.10 per cent, to 13,041.85. The Standard & Poor's 500 Index dropped 34.43 points, or 2.35 per cent, to 1432.36. The Nasdaq Composite Index tumbled 60.61 points, or 2.37 per cent, to 2500.64.
Reflecting concern that the fallout from the subprime debacle is spreading, shares of State Street, the world's biggest institutional money manager, fell as much as 4 per cent on worries about the company's US$20 billion-plus ($28.8 billion-plus) in commitments to asset-backed commercial paper programmes.
Meanwhile, British bank Barclays denied a report that it has several hundred million dollars of exposure to failed debt vehicles structured by its investment banking arm.
"The credit story is back, with headlines about banks' exposure meaning that risk aversion is back to the fore," said Ian Stannard, senior FX strategist at BNP Paribas in London.
The European Central Bank, Bank of Japan and Bank of Canada all said market turmoil could affect their decisions on monetary policy.
US Federal Reserve chairman Ben Bernanke will take the spotlight this weekend when he gives a speech on housing and monetary policy.
Investors are becoming increasingly confident the Federal Reserve will cut interest rates at its next meeting in September, and that other central banks will abandon plans to raise rates in the near term.
ECB president Jean-Claude Trichet cast fresh doubt on the chances of a euro zone rate rise next week. His last comments on monetary policy, made on August 2, when he used the "strong vigilance" phrase assigning tightening was likely, were made before the current market volatility, he said. The Bank of Canada said risks to the Canadian economy had risen as a result of credit market turmoil, adding this would be taken into account at an interest rate review on September 5.
Some Bank of Japan policy board members have also expressed concern about the risks of US subprime mortgage problems spilling over.
Germany has so far borne the brunt of the European fallout from problems stemming from subprime US home loans, as two of its banks have needed major bailouts.
China said it had only a limited exposure and its banks had set aside adequate provisions for dealing with the problems. The S&P/Case-Shiller US National Home Price Index showed the sharpest decline since 1987 in the second quarter.
- Reuters
