Fears of fresh stock market falls

It is feared that Asian and European shares could fall further on Monday after New York's Dow Jones Industrial Average fell 208 points on Friday.

The Dow had its biggest weekly fall since March 2003 after banks involved in big buyouts failed to find buyers for $20bn (£9.8bn) worth of debt.

That made investors wonder whether the current acquisition-fuelled rally could be coming to an end.

There have also been more indications of problems in the US housing market.

Last Tuesday, the biggest US mortgage lender Countrywide Financial, reported a fall in quarterly results.

On Monday, HSBC will report its results, which are also expected to have been hit by the rising level of defaults in the sub-prime mortgage market.

The stock market as a whole may be set for some dismal days Robert Peston BBC Business Editor Read Robert's blog

Sub-prime mortgages are loans to house buyers with inferior credit records.

Along with the problems in the US housing market, the main problem is that many investors are worried about an impending credit crunch.

In past years, financial markets, companies and consumers have all benefited from low interest rates and easy access to money, helping fuel a boom in spending, house price inflation and corporate takeovers.

Now, interest rates are rising and set to stay higher as central banks try to rein in inflation.

A large part of the rise in share prices in the past year has been driven by the takeover boom, with private equity bidders pushing up the value of the firms they are targeting.

Interest rates

Most of these deals are paid for with borrowed money and the banks who have loaned this cash have been laying off a large proportion of the loans by selling them to other investors.

However, because investors are bruised by their losses in the US sub-prime mortgage market, they are now less keen on buying the loans from the banks, taking away the credit needed for takeovers and prompting share prices to fall.

According to the Sunday Times, bankers in America have taken on $200bn (£98.5bn) that they have not yet passed onto other investors, while in Europe the figure is about £40bn.

People worried about a credit crunch and the end of cheap money for acquisitions will at least be encouraged that the Bank of England and the European Central Bank are both expected to keep interest rates unchanged at their monthly meetings on Thursday.