Financial markets experienced slightly calmer conditions yesterday as the recent flow of grim credit-related news showed signs of abating.
But the mood remained extremely nervous as investors continued to fret about reports of hedge funds having problems in meeting clients' requests for funds.
Quincy Krosby, chief investment strategist at The Hartford financial services group, noted the calmer mood on Wall Street but cautioned that markets were far from being out of the woods yet.
"This is really a day-by-day market at the moment," she said. The concerns that we have seen recently still have at least three to four months to play out.
"Investors will not be happy that the market has really bottomed until we see some lasting stability in the financial stocks."
Goldman Sachs said the short-term outlook for financials was not good.
"The credit pipeline is still bulging and more financial companies are likely to announce market-related losses," said strategist Peter Oppenheimer. "However, medium-term, we believe the risks are not so high.
"Furthermore, the impact on the European economy is likely to be muted: there is no mortgage crisis, debt levels are low and financial conditions have tightened only modestly."
Credit market concerns and the direct impact of exposure to the crisis-ridden US market for subprime, or risky, mortgages have made for very volatile global markets in the past few weeks, with investors focusing on large financial houses to gauge their involvement.
Several European banks, including BNP Paribas and UBS, have been forced to admit they have been affected, a fate that yesterday befell KKR Financial Holdings, an affiliate of the powerful leveraged buyout firm Kohlberg Kravis Roberts.
The group said it will lose about $40 million from selling $5.1 billion in residential mortgages and warned that an additional $200 million hit could be coming.
Analysts said this may lead to bankruptcy.
On the consumer side, US department store Macy's blamed the "difficult" consumer climate for a 77 per cent decline in quarterly profits.
In Europe the FTSEurofirst 300 index of top European shares closed just 0.19 per cent lower after spending much of the day deep in the red, while the FTSE 100 and CAC 40 also rallied from their low points.
In Britain the FTSE 100 closed down 0.6 per cent, while France's CAC 40 fell 0.7 per cent. Germany's DAX meanwhile bucked the negative trend with a 0.3 per cent rise, powered by takeover talk in Bayer.
The story in Ireland was similar, with the Iseq index of Irish shares at one point trading down as much as 2.2 per cent, before recovering towards the close to end the day down just 0.6 per cent.
The momentum was helped not only by the strength on Wall Street, but also by big gains in several European stocks.
Swiss food group Nestlé jumped 9.5 percent after posting strong results and unveiling a large buyback programme, while drugs and chemicals group Bayer gained 5.4 per cent on market talk that Swiss rival Novartis was considering a bid.
Neither Bayer nor Novartis would comment.
Still, it was not all good news. In the UK, Northern Rock slipped as much as 10 per cent on concerns over deteriorating credit markets, but it recovered to end 5.3 per cent lower after it said difficult funding conditions were now easing.
- (additional reporting Reuters.)
