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Last Updated: Monday, 13 August 2007, 20:16 GMT 21:16 UK
Jitters remain among US investors
Traders on the New York Stock Exchange
Analysts say they do not yet know the scale of the problem
Jitters continued among US investors as worries about losses linked to sub-prime lending offset earlier gains.

Wall Street had moved higher in early trading as the Federal Reserve pumped an extra $2bn into global markets.

However the Dow Jones closed largely unchanged, down 0.02% at 13,236.5 while the Nasdaq lost 0.1% to 2542.4.

Earlier European and Asian markets had made strong gains, after last week's global sell off, as central banks tried to ease fears of a world credit crisis.

The European Central Bank earlier said on Monday it was injecting a further 48bn euros into the banking sector.

London's FTSE 100 closed 2.3% up at 6,237.8, France's Cac-40 ended was 2.2% ahead and Germany's Dax rose 1.8%. Asian markets had posted modest rises.

US investors reacted well to official figures showing a stronger-than-expected rise in July's retail sales.

But they continued to sell shares in financial firms as uncertainty about who would be next to be hit by concerns over lending.

Sub-prime woes

Recent financial market volatility has been triggered by the US sub-prime mortgage sector, which offers higher-risk loans to people with a poor credit history.

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As US interest rates have risen and the housing bubble has burst, a growing number of sub-prime borrowers have defaulted on their loans prompting extensive financial difficulties for a number of investment funds with heavy exposure to the sector - and triggering fears of a wider financial crisis.

While some estimates say $300bn in loans could be at risk, one of the biggest worries for investors is not knowing the eventual scale of the problem.

"The big question is what is the overall amount [of loans at risk], and this is bad for the markets because if there is one thing that the markets hate, it is uncertainty," said Gilles Moec, senior economist at Bank of America.

Over the weekend several banks began putting a figure on their bad debts, including German state bank WestLB which said it had 1.25bn euros in total exposure to the US sub-prime sector.

Banking moves

To try to ease fears over available credit, several central banks have intervened by injecting money into the banking sector.

The European Central Bank (ECB) was the first - releasing 95bn euros on Thursday. It has since put in another 109bn euros.

Japan's central bank put one trillion yen ($8.5bn; 4.2bn) into the financial system last week and 600bn yen on Monday.

Most importantly, the Fed intervened twice on Friday, pumping $38bn into the system, before Monday's extra contribution.

But while some said it made sense, other feared it only made markets more nervous.

"The ECB was correct to shore up banks' balance sheets by providing more liquidity," said Peter Morici, professor at the University of Maryland School of Business.

"But its high-profile tender offer did more to scare markets than calm them."

Other analysts said it did not solve the underlying weakness in the US mortgage sector.

"It's certainly very reassuring that central banks are providing liquidity, but that doesn't repair or make go away any losses funds have experienced from the sub-prime sector," said Guy Hutchings, of MFS Investment Management.

As a result of the calm on the markets, oil prices had initially made gains but retreated on news that refinery problems were not as bad as initially thought.

US light, sweet crude rose 15 cents to settle at $71.62 a barrel on the New York, having risen above $73 earlier while in London Brent crude fell 16 cents to $70.23 having been close to $72.

Possible effects of the market trouble


FTSE 100
23.70 0.44%
19.54 0.34%
Cac 40
14.48 0.38%
Dow Jones
78.53 0.76%
35.31 1.58%
S&P 500
11.22 1.02%
BBC Global 30
20.65 0.36%
Data delayed by at least 15 minutes

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