A Worrying Sign

On Thursday, Wall Street sank as much as 448 points before bouncing back somewhat, ending with a loss of 2.26% on the back of concerns that the US sub-prime mortgage crisis could have a larger impact on other markets worldwide than previously thought. Data showed sales of new homes dropped 6.6% in June. Over the past one year, sales of new homes plunged 22.3%.
There were concerns that the faltering US housing sector will hurt banks and finance companies enough to curb the availability of credit on which the economy feeds. That, in turn, could impact on private equity groups because their takeover bids are often financed by large amounts of bank debt. For instance, Britain's Cadbury Schweppes said Friday reported that it has been forced to extend the timetable for the sale of Americas Beverages due to the recent extreme volatility in debt markets. Some analysts believe that Cadbury may have to sell Americas Beverages for 7.0 billion pounds (USD14.25 billion), instead of the 8.0 billion which investors had anticipated.

Global stock markets were rocked by Dow's huge fall yesterday. Major stock markets across Asia, with the exception of China, fell heavily with the highest 4.22% recorded by Taiwan,
followed by South Korea (4.09%)! Malaysia KLCI, surprisingly held up quite well, falling by only 1.89%. This seems to indicate that Malaysia's stock market is still in a bullish tone, unless Dow's problem persists.

The big question mark is how should investors react to such adverse condition? Is there going to be a quick recovery or a prolong crisis? Much will depend on the upcoming economic data to be released by US. Some calming news did emerge today, as US GDP for the 2nd quarter was better than expected, recording 3.4%, which was the strongest since the first quarter of 2006. It will be interesting to see if this latest piece of positive news help restore some confidence and stage a strong recovery in Wall Street.