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Last Updated: Monday, 22 October 2007, 18:04 GMT 19:04 UK
Q&A: What's troubling the markets?

Tokyo market watcher
Markets across Asia have been among those affected

Stock markets around the world have fallen sharply on concerns about the deteriorating economic situation in the US and its impact on global growth.

Housing and credit worries have beset the markets for most of the year and the outlook for 2008 is increasingly uncertain.

How much are markets falling?

Japan's main Nikkei share index fell 2.2% on Monday, while markets in Australia and South Korea tumbled 2% and 3% respectively.

European markets followed this lead, with the FTSE 100 index in London losing 1% while shares also dipped sharply in Paris and Frankfurt.

The volatility was triggered by heavy selling on Wall Street on Friday, where the Dow Jones index lost 2.6% of its value.

The fall came on the 20th anniversary of the 1987 stock market crash, known as Black Monday, when the market lost 23% of its value on a single day.

What is causing this latest bout of selling?

The share falls are being driven by growing pessimism about US economic prospects and their ramifications for the global economy.

The main fear is that weakness in the US housing market is now spreading to other areas of the economy.

Engineering firm Caterpillar, seen as a barometer of how the manufacturing and construction industries are faring, said it was seeing signs of a sharp slowdown in activity.

The firm believes the chance of a recession in the US next year is now as high as 50%.

Its gloomy prognosis came on top of fresh evidence of housing woes, with figures showing a 10% fall in new homes being built in September.

Applications for new building permits, a key sign of future demand for housing, were down 7% in the same month.

The housing market now faces an oversupply of properties and acute problems in the sub-prime lending sector, where many low-income borrowers have defaulted on their payments because of high interest rates.

Mortgage financiers have warned it may not fully recover until 2010.

Wall Street
The latest economic news in the US has not been good

Market watchers have also been spooked by a series of disappointing trading updates from the leading US banks.

JP Morgan, Citigroup and Bank of America have all reported falling profits in the last month, as the global credit squeeze has hurt their business.

Firms have drastically tightened their lending conditions - and in some cases suspended lending altogether - as they try to assess the scale of their exposure to risky sub-prime investments and protect themselves.

Regulators are concerned that the complexity of financial instruments used by banks means they cannot accurately measure their debt risks - and that problems in one part of the banking system can spread rapidly to other sectors.

These worries are shrinking the amount of money available to companies to fund big takeovers, something which has fuelled the growth in stock markets in recent years.

How vulnerable is the US economy?

Most forecasters believe the US is now set for a sharp slowdown next year, as falling house prices and financial uncertainty make firms and consumers more cautious.

The International Monetary Fund recently warned that annual growth could slow to 1.9% in 2008, down from its previous forecast of 2.8% expansion.

This echoed similar predictions of a slowdown from the likes of the Organisation for Economic Co-operation and Development (OECD) and the World Bank.

Despite the housing weakness, the US economy has proved pretty resilient this year.

The labour market has remained fairly robust, with more than 100,000 new jobs created last month, while the weakening dollar has made life easier for exporters and improved the country's trade balance.

There have been few signs that people are dramatically reining in their spending, vital to the health of the overall economy, with retail sales figures remaining pretty strong.

But economists say it is only a matter of time before retailers are affected, as households, already struggling with high fuel bills, decide to cut back on their expenditure.

Activity over the Thanksgiving and Christmas periods will be seen as a crucial indicator of whether this is happening and how severe the fallout could be.

Why does this matter outside the US?

The old saying, that "when the US sneezes, the rest of the world catches a cold", applies more than ever these days.

In the globalised economy, the ripples from a downturn in the world's largest economy will be felt far and wide.

As banks wake up to the risky nature of some of their lending, investment in everything from projects in developing countries to capital for new technology could be hit.

The US's main trading partners are all likely to be affected. The IMF recently downgraded 2008 growth forecasts for the UK, Germany and France.

The Chinese economy is still powering ahead, but even its phenomenal growth is expected to ease a little next year.

Meanwhile, the Indian stock market has problems of its own, with government plans to curb heavy foreign buying of shares leading to extreme volatility in recent days.

What may policymakers do to shore up confidence?

The US Federal Reserve took the dramatic step of cutting interest rates by a half-point to 4.75% last month.

The move was designed to make it cheaper for firms to borrow money and to boost confidence in financial markets.

Fed chairman Ben Bernanke
People are looking to Fed boss Ben Bernanke for further help

It was also aimed at making life easier for homeowners, struggling with high mortgage and credit card costs, and giving a boost to consumer spending.

But many analysts now believe this will not be enough to ward off economic distress next year, putting pressure on the Fed to cut rates further next month.

Policymakers around the world are watching developments in the US closely.

There is a growing belief that the Bank of England could cut rates before the end of 2007, while most central banks around the world have put future rate rises on hold.

"The Bank of England does have scope to cut interest rates," says Professor Peter Spencer, chief economic adviser to the Ernst & Young Item Club.

"But I don't think there will be big cuts as they stand."


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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