Global stock markets were rattled by fears that leveraged buy-out deals could dry up in the face of increasing investor aversion to risk.
Equities were unsettled after banks dealing with Kohlberg Kravis Roberts’ buy-out of Alliance Boots failed to sell £5bn of senior loans to fund the deal. Chrysler said it was suspending its $12bn auto loan deal and sweetening pricing terms on a further $6bn of loans.
US stocks started out in fine form, jumping more than 100 points in the opening minutes after some upbeat earnings from Boeing and ConocoPhillips.
Those early gains evaporated after news of the troubled takeover refinancings broke but stocks managed to rally back before the market closed. The Dow Jones Industrial Average rose 0.5 per cent, the S&P 500 was also up 0.5 per cent, while the Nasdaq Composite rallied 0.3 per cent.
European equities were hit by poor results from Siemens, the German conglomerate, and Volvo, the Swedish truckmaker. The FTSE Eurofirst 300 ended 0.9 per cent lower.
On currency markets, risk aversion drove the dollar higher as weak US home sales data added to concerns about the housing market.
Existing home sales for June fell unexpectedly sharply to 5.75m, the lowest for almost five years, adding to fears of a severe and prolonged housing slowdown. Earnings disappointments and profit warnings from corporate America have provided anecdotal evidence of the burgeoning downturn during the past few weeks. Warnings this month from DR Horton, the housebuilder, and Home Depot, the home improvement retailer, were joined on Tuesday by weak earnings from Countrywide, the mortgage lender, and USG, the building materials group. “The slowdown in the US housing market is turning uglier by the month,” said Dimitry Fleming at ING Financial Markets. “From the peak in February 2007, sales have now dropped 14 per cent.” The dollar rallied against the euro and the pound as investors cut their exposure to risk and yen-based carry trades, where the low-yielding Japanese currency is sold to fund higher-yielding purchases.
Analysts said currency speculators, in unwinding some of their carry-trade positions, had sold the euro and sterling against the yen, which forced the dollar higher against both
The euro fell 0.6 per cent against the yen and 0.8 per cent against the dollar, while sterling fell 0.3 per cent and 0.5 per cent respectively.
“A move that started with a weak dollar had the effect of helping the US currency against the euro in a classic tail wagging the dog move,” said Alan Ruskin at RBS Greenwhich Capital.
The dollar climbed 0.2 per cent against the yen.
Gold, which hit an 11-week high on Tuesday, fell 1.7 per cent as the dollar’s recovery prompted profit taking.
Ashraf Laidi at CMC Markets suggested European central banks had stepped up their gold sales to meet annual quotas set up under the Central Bank Gold Agreement.
“The four-year agreement states that central banks can sell up to 500 tonnes of gold per year,” Mr Laidi said.
He added: “Only two-thirds of the quota is estimated to have been sold this year, allowing central banks seven weeks to meet their quota.”
Other metals were weaker as caution on commodities markets heightened after the US data.
Copper fell on fears that a slowdown in the US housing market would damp demand for the metal, used in plumbing and wiring.
U.S. crude prices jumped 3.2 per cent to close at $75.88 a barrel after a big fall in weekly inventories.
Credit markets were further shaken as the latest monthly performance data on subprime mortgage securities, which show delinquency rates, where borrowers fail to make payments as required, were rapidly increasing.
Benchmark ABX indices, which are created every six months to track the credit risk of loans made in the previous six-month period, hit record lows on Wednesday following the data.
Government bonds prices were a touch firmer. The yield on the 10-year Treasury was a little lower at 4.90 per cent, after earlier falling below 4.9 per cent, a seven-week low, while the yield on the 10-year Bund had fallen to 4.40 per cent.
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