London’s FTSE 100 endured similar turbulence, falling 0.9 per cent soon after the open – dipping below its starting point for the year – before rallying sharply to turn 1 per cent higher.
”With uncertainty prevailing on credit, markets are likely to see levels of volatility like this for many sessions to come, until the strength of losses from sub-prime level are known and whether they are containable,” said David Buik at Cantor Index.
Weakneses in bank stocks and financial names persisted amid worsening upheaval in global credit markets.
By mid morning in London, the FTSE 100 was up 0.5 per cent at 6,280.7, while the FTSE Eurofirst 300 index was up 0.2 per cent at 1,531.45.
In European credit derivatives markets, the iTraxx Crossover index, a key indicator of sentiment, also recovered from an early sell-off. The annual cost of insuring €10m of European corporate debt against default eased to €415,000 from a high of €445,000.
Jitters in the credit markets have sparked fears about an end to the leveraged buy-out boom, and global equity markets have suffered. Private equity buy-outs and takeover speculation have boosted share prices for some time, but turmoil in the credit markets now threatens to make funding of deals more difficult.
Friday’s early fall came after London’s blue-chip index experienced its worst one-day sell-off in more than four years on Thursday.
In New York, the Dow Jones Industrial Average closed down more than 300 points or 2.3 per cent at 13,473.57.
On Friday Asian stock markets joined the global tumble. In Japan, the benchmark Nikkei average dropped more than 2 per cent to hit its lowest level in nearly three months while the yen hit a three-month high against the dollar.
But markets in Australia, Hong Kong and India were all down by around 2 per cent, with MSCI’s index of Asia Pacific stocks excluding Japan down by more than 2 per cent.
There was also fallout in emerging Asian currencies, which fell sharply on Friday on concern that the deterioration in the US housing market could raise credit costs and put a brake on the global economy. The Australian dollar, Indian rupee, Indonesian rupiah, and Philippine peso were among the biggest losers as risk-averse investors moved to less volatile assets.
The Japanese yen was the region’s sole gainer as investors unwound carry trades, whereby they borrow in low-yielding currencies such as the yen for investment in other currencies or markets with higher yields. That drove the yen to a three-month high against the dollar and a six-week peak versus the euro.
Globally, investment bank stocks fell on fears they will have to use their own balance sheets to fund more of the finance they have committed to provide on leveraged buy-outs.
This week, banks gave up their attempt to sell to investors $20bn of debt related to the buy-outs of Chrysler and Alliance Boots.
A Financial Times analysis shows this takes to more than $40bn the amount of high-yield debt banks have taken on their balance sheets that was meant to be sold in the past few weeks.
Leading bankers say the market for selling leveraged debt is in effect closed for the moment, but lenders are facing a pipeline of commitments for the rest of the year, estimated at more than $300bn in the US alone.
The biggest lenders are the large commercial banks such as JPMorgan Chase, Bank of America and Citigroup. But the investment banks, led by Goldman Sachs, have dramatically scaled up their commitments to leveraged buy-outs this year.
According to regulatory filings, Goldman, Morgan Stanley, Lehman Brothers and Bear Stearns had combined non-investment grade commitments of about $180bn at the end of May. The bulk of this figure relates to commitments on leveraged buy-outs.
None of the banks would say what ha...