US housing slump may trigger crisis, warns Morgan Stanley financial crisis
By Ambrose Evans-Pritchard/Telegraph - UK
Last Updated: 1:43am BST 28/03/2007
telegraph.co.uk
America's housing slump is more serious than widely believed and risks setting off a full-scale global crisis, Morgan Stanley has warned in a note to clients.
The US bank said the sudden deterioration in the sub-prime sector knocked away the "cornerstone" of US household consumption and threatened contagion to a broader nexus of complex derivatives.
"US sub-prime has the potential to turn into a real financial crisis. We do not make this assertion lightly," said Teun Draaisma and Graham Secker, the bank's two chief equity strategists for Europe.
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"While the US economy seems to be slowing down, there has been overheating elsewhere in the world, and monetary tightening in Japan, India, China, UK, and Euroland. These may be the early signs of a classical boom-bust scenario," they said.
The warning came as fresh US data showed new homes sales fell 3.9pc to a seven-year low in Feb, following a 15.8pc drop in Jan. Most economists had expected a rebound.
The glut of unsold homes has risen to 8.1pc, the worst since the property crunch of 1990.
Morgan Stanley said that even if the mini shake-out on world bourses since late February proves part of a normal mid-cycle correction, it is likely to entail another downward leg. "We think the bull correction is incomplete, and it could be worse than just a bull market correction," said the report.
"For a true correction to be complete, markets need to go through three distinct phases: the three C's of complacency, caution, and capitulation," it said.
The average fall of the MSCI index of European stocks over the past corrections since the mid-1980s is 19pc over 49 days, compared to 1.5pc this time in 24 days. The bank said its valuation indicator was still near an all-time high, flashing tactical sell signals. "We would rather be in cash than equities," it said.
Morgan Stanley said financial crises tend to emerge gradually with a "deteriorating news flow" over several months before investors wake up to the threat, much like the unfolding housing drama.
Some 40pc of all mortgages issued in the US in 2005 and 2006 were either sub-prime or low-tier 'Alt-A' loans vulnerable to foreclosure, but the damage is likely to extend far beyond this sector as house prices fall across the board. The bank predicted $500bn (£254bn) in defaults, setting off a chain of problems in the market for collateralised debt obligations.
"Sub-prime may be the trigger for a big rise in the savings rate and a fall in consumer spending growth," said the bank. |
