A Real Threat on Liquidity Crunch?

Global markets have truly suffered a highly turbulent moments since last week, contributed by the extreme volatility in Wall Street as a result of its worsening subprime woes and impact on credit crunch. More and more subprime lenders and even investment bankers around the world were either issuing warnings, reported major losses and some investment funds were even being stopped from further withdrawals. This has a serious impact on credit and tightens liquidity in the global market, which had been previously high in abundance and provided huge appetite for high yielding investments and as a result, led to a major uprise in all major assets classes.

Now, liquidity is under a serious threat as last Friday, the European Central Bank, the Bank of Japan and US Federal Reserve together pumped USD162.5 billion into the world financial systems to head off a major crisis of confidence. The last time US Federal Reserve did this was after the 911 event. This was an act of reassurance, which suggest that Governments around the world are ready to supply credit in order to restore the confidence and avoiding panic around the globe.

In Asia (ex Japan), the scenario was somewhat different. Although central banks of Singapore, Indonesia and South Korea were also quoted to be on standby mode to supply funds to the market, it never happened or at the most, it was only a token of intervention. This suggest the risk of subprime exposure in Asia is far less significant. This could be due the fact that Asia led by China and India has seen tremendous and sustainable growth for the past few years and thus increased intra-Asia trade and reduced dependency on US. The continued economic growth of these two countries will likely spearhead support of such trend.

Unlike the previous crash in February, the current volatility in Wall Street may prolonged for the next one to two months as the subprime woes may not have bottomed out. So it may take a tad longer time this time for the dust to settle and for global investors to restore confidence.

However, in any deep lying problems there lies potential opportunities, particularly for the Asia stock markets. As the Asia growth stories continue to unfold, it is a matter of time investors confidence will be restored, particularly the fact that US economy is still at a healthy growth despite the subprime problems. In fact, the subprime mortgage factor should not overly impair US economy as the pain is confined to the subsegment of the property market and financial institutions. After all, the total subprime loans only made up 4% of the total loans in US.