Nikkei Drops 2.5% on Credit Worries

123jump.com Staff
08 Jul, 2008
New York City

Japan market indexes traded in the negative territory led by financial stocks on resurgent credit worries after Lehman Brothers noted that the new accounting rule in the U.S. may force Freddie Mac and Fannie Mae to raise an additional $75 billion to meet capital requirements. Sumitomo Realty led decliners in the Nikkei 225 with a drop of 6.21% followed by losses in Mizuho Trust & Banking and Nissan Chemical Industries.

[R]5:00AM New York, 7:00PM Tokyo - Nikkei drops on renewed credit worries.[/R]

Japan market indexes traded in the negative territory led by financial stocks on resurgent credit worries after Lehman Brothers noted that the mulled FAS 140 rule will force Freddie Mac and Fannie Mae to raise an additional $75 billion to prevent more writedowns.

Market Sentiment

In Tokyo trading Nikkei 225 fell 2.45% or 326.94 at 13,033.10, and the broader Topix Index slumped 2.2% or 29.29 at 1,283.51.

In the first section of the Tokyo Stock Exchange 8.8 billion shares worth 926 billion yen were traded and in the second section 164 million shares valued at 2.5 billion yen changed hands.

Of the Nikkei 225 stocks 11 rose, 210 declined, and 4 were unchanged. Mazda Motors led advancers in the index shares with a rise of 3.04% followed by Nippon Meat Pack increasing 1.47%.

Freddie Mac and Fannie to raise $75 billion

Lehman Brothers said in a report the U.S. largest buyers of home mortgages Fannie Mae and Freddie Mac will need to raise an additional $75 billion to prevent more writedowns due to the proposed change in the accounting standards.

The proposed FAS 140 rule will stop companies from keeping their assets in off-balance sheet entities, a development that will compel the two mortgage lenders to bring mortgages onto their books.

Consequently, Fannie Mae and Freddie Mac will need to add $46 billion and $29 billion respectively to boost capital. However, the companies have asked investors for $25 billion since last December.

According to Bloomberg News, Fannie Mae has so far managed to raise $6 billion in order to prevent writedowns on mortgages in guarantees, while Freddie Mac raised $13.5 billion.

By yesterday, the two companies had lost 60% of their market value this year, driven by news that their cost of borrowing, when compared with what the government pays, had increased to their widest spread since March.

Separately, Citigroup noted yesterday that Merrill Lynch might report a second-quarter loss after $6 billion of writedowns.

Merchants Sentiment Falls to 29.5 in June

The Cabinet Office reported today on its Web site in the Economy Watchers Index- which gauges the opinion of service providers who deal with consumers- that Japan merchant’s sentiment dropped to a six year low from 32.1 in May to 29.5 in June.

Economists believe that the high oil prices and the continued spiral of food prices has negatively impacted on consumer spending.

Gainers & Losers

Mazda Motors led advancers in the Nikkei 225 index shares with a rise of 3.04% followed by increases in Nippon Meat Pack of 1.47%, in Kansai Electric Power of 1.21%, in Chubu Electric Power of 1.17%, and Shiseido Co Ltd of 0.91%.

Kansai Electric Power and other utility stocks rose as oil prices retreated, easing inflation worries.

Sumitomo Realty led decliners in the Nikkei 225 index shares with a drop of 6.21% followed by losses in Mizuho Trust & Banking of 5.95%, in Nissan Chemical Industries of 5.84%, in Daikin Industries of 5.82%, in Mitsumi Electric Co of 5.82%.

Mizuho Trust & Banking slumped on renewed credit worries after Lehman Brothers said the proposed introduction of FAS 140 rule will force U.S. two biggest mortgage lenders Freddie Mac and Fannie to raise an additional $75 billion to offset writedowns.

Other financial stocks declined as well. Sumitomo Trust & Banking plummeted 4.95% on the news.

Commodities also fell as crude oil declined 2.7% to $141.37 a barrel on slowing demand. Inpex Holdings shed 5.22%, Sumitomo Metal Mining shed 5.24% and Japan Steel Work slid 4.92%.