Another tough day on world markets.

More warnings, more investment funds in trouble, finance companies in Canada unable to refinance debt, mortgage interest rates set to rise regardless of what the Reserve Bank does and two major American companies and a global bank warning that the subprime problems will cut earnings and sales. Phew.

Wall Street fell sharply; the Aussie dollar did too (to less than 83.50 USc).

Hours after the European Central Bank’s fourth and smallest cash injection — $US10.4 billion — into European financial markets, its head, Jean-Claude Trichet, made an unprecedented public appeal for calm.

He said in a statement that financial markets were returning to normal, but it seems no-one was listening. Share prices fell in Europe and the US. In Tokyo, the Bank of Japan drained $US13.5 billion after coming to the conclusion that the problem was over.

The biggest worry is the $US1,500 billion global asset-backed commercial paper markets, where there was evidence yesterday of an impact in countries previously unaffected. RAMS and Bluestone, two Australian non-bank lenders, joined the queue of overseas groups being forced to pay more for money from this market.

That could force up the cost of their mortgages in Australia by up to half a per cent.

Major global bank, UBS, reported good second quarter earnings but warned that the turmoil in markets would hit profits and revenue for the rest of the year, especially in investment banking — It is a major investment banker in Australia and handled the recent float of RAMS. Yes, it’s a circular world at times.

One point to watch is Australian property trusts (or REITs as they’re called in the US). Merrill Lynch has cut the ratings on ten funds to sell because of the credit market and property problems for some of them.

Australian property trusts have invested more money than any other country in US retailing property assets in the past two years.

Part of yesterday’s woes came from a US fund called Sentinel, a little-known money manager with $US1.5b billion.

It had told the US Commodity Futures Trading Commission that it wanted to suspend redemptions. That request was later denied, leaving Sentinel in a difficult position: Unless its clients agreed, it would possibly have to dump difficult-to-sell securities, which would drive down prices even further, forcing Sentinel — and its clients — to take big losses.

Despite the Commission’s ruling, Sentinel halted client redemptions anyway after failing to meet mounting requests from investors to withdraw their money.

Sentinel isn’t a hedge fund; it handles money for clients such as managed-futures funds, high-net-worth individuals and hedge funds that want to be able to withdraw their cash quickly. Its investments include short-term commercial paper, foreign currency, investment-grade bonds and Treasury notes.

The firm is a victim of panic by investors caused by the collapse of the subprime-mortgage market.

In the US, the share prices of major investment banks, Bear Stearns (which kicked off the problem when two of its hedge funds imploded because of illiquid investments in subprime mortgage backed securities) and Lehman Bros, both fell sharply on suggestions both had major problems from the subprime fallout. Both were major financiers of subprime mortgages and the associated credit derivatives.

We know where it all began. As to where it will stop, anyone’s guess at this stage.

Peter Fray

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