The New Nation - Internet Edition

AFP, New York

Global investors will be watching nervously for signs of contagion from the US housing meltdown and a credit squeeze in coming days, even after a broad stock markets rebound over the past week from recent turbulence.

Major markets posted healthy gains over the past week after central banks stepped up their actions to keep credit flowing amid fears of a widening crisis involving subprime or "junk" US mortgage loans.

Wall Street's blue-chip Dow Jones Industrial Average rallied 2.29 percent in the week to Friday while the broad-market Standard & Poor's 500 advanced 2.31 percent and tech-led Nasdaq composite added 2.86 percent, recouping a portion of the hefty losses earlier this month.

London's FTSE rallied 2.57 percent, while Frankfurt's DAX 30 jumped 1.74 percent and the Paris CAC 40 rocketed 3.84 percent in value.

In Asia, Japan's Nikkei index surged 6.39 percent and the benchmark Hang Seng Index in Hong Kong leapt 12.43 percent

Yet many investors are still reeling from the plunge earlier this month and remain concerned that the credit problems emanating from the US housing market slide has yet to be played out

"Global credit markets are in the midst of a liquidity crisis driven by uncertainty, fear and mistrust," said Sal Guatieri, economist at BMO Capital Markets in Toronto.

"Due to rising default rates, investors have lost confidence in a broad range of debt obligations linked to US subprime mortgages, causing them to shun many borrowers, re-price risk higher, and sell all but the safest of assets."

Because the loans from US subprime mortgages were packaged into securities sold to banks, funds and others globally, it remains unclear who is holding the bad loans, Guatieri said.

"The stress in the US subprime mortgage market has spread to other countries and other debt classes, including the usually liquid and safe overnight interbank and commercial paper markets. Unsure of who is holding toxic loans, banks have balked at lending even to one another for just one day," he said.

But he said the credit squeeze will cause some economic damage and "has the potential to cause a recession if it leads to a broader sustained credit crunch."

Paul Sheard at Lehman Brothers said shocks have reverberated through global markets and it remains unclear how much impact this will have.

"Questions remain. Do these shocks presage a serious and prolonged downturn in the US economy that will spill over to the rest of the global economy, perhaps as part of a multiyear adjustment of global imbalances?" he said.

Sheard said he sees the expansion continuing globally "but the risks of the gloomier outcome have risen."

Some analysts say that current share price levels represent a great buying opportunity for investors. "European equities still look atractive," said ABN Amro analyst Ian Richards.

"Despite the plentiful headlines surrounding US subprime mortgage problems, US economic prospects look robust," he added.

Al Goldman at AG Edwards said markets appear to have undergone a healthy correction.

"We believe the recent sharp decline was a normal, albeit very unpleasant, correction in a still ongoing bull market," the market strategist said.

"Stocks were overdue for a normal 10 percent correction, and the subprime mortgage/credit market debacle provided a very valid excuse. The economic positives remain corporate earnings, the labor market, personal income and no inflation problems."

Looking ahead, markets will get key US economic data including a report Monday on existing home sales, a new estimate of second-quarter gross domestic product Wednesday and personal income and spending on Friday.

But analysts say these reports will reflect past activity before the credit squeeze, so may offer few clues on future trends.

More significant may be remarks due from Federal Reserve chairman Ben Bernanke Friday on housing and monetary policy, which could provide clues on the economic outlook and the Fed's next moves.

"There is litle doubt that the market is building in a rate reduction at the September 18 (Fed interest rate) meeting with a bold minority opting for a 50 basis point cut," said Larry Wachtel at Wachovia.

"Of course, in the three weeks between now and then a lot can happen. So, the word on the Street is to stay loose and always be aware of the exit signs."