Subprime Woes Have Worldwide Consequences

The subprime concerns continue to drive volatile trading in the U.S. markets. The Federal Reserve continues to support the banking system and try to prevent any collapse. After injecting billions into the banking system last week, the central bank infused the banking system with another $17.25 billion on Thursday.

 Yet the subprime and credit problems in the U.S are not only impacting U.S. financial companies and stock markets; the impact has spread to companies worldwide. For instance, news surfaced that three banks in Asia plummeted after reporting significant exposure to the U.S. home credit market.

 Singapore-based DBS Group Holdings, Bank of China, and its Hong Kong subsidiary, BOC Hong Kong, have a combined $13.0- billion exposure to the U.S. subprime mortgage market. In my view, this is a potential threat to the Asian banking system, which is already said to be somewhat fragile and vulnerable to market risk.

 The problem I see in Asia is the speculation that has driven up stocks there could easily reverse and drive speculators and traders to the exits on any hint of further credit issues in the U.S.

 Also keep in mind that China has a whopping $1.2 trillion in foreign exchange reserves. The significance here is whether it could have an impact on U.S. bond markets, as about two-thirds of the reserve is currently held in U.S. dollar assets such as Treasury bills. Selling this would pressure U.S. bond markets and may force the U.S. to increase interest rates to make the instruments more attractive to hold. If this should materialize, I believe it would be negative and add to the current credit woes.

 The end result could be a sell-off in markets around the world. China for instance is already overextended versus its valuation, so any signs of further credit erosion could be damaging. I advise you to remain prudent in trading and avoid unnecessary risk.