For months the likes of Citigroup, Merrill Lynch, US Treasury Secretary Hank Paulson (ex Goldman Sachs) and any number of shrills for the bulge bracket banks on Wall Street have been telling investors that the subprime mortgage market bust would not have a wider impact.

Equally, business media, from The Economist to the Financial Times, Business Week and the like were sanguine, confidently predicting little spillover; although The Economist and the FT have become far more realistic in the past month as the extent of the problems has become apparent.

But the likes of Alan Greenspan, the former Fed chairman, and Warren Buffett, the wealthy US investor, have been concerned the problems in subprime mortgages would spread and become a bigger problem. Now the credit crunch has bitten and spilled over into the wider US market from the stricken US housing industry.

Stockmarkets fell between 2.5% and 3% in Europe and the US last night, commodities were sold off as hedge funds and other speculators exited and corporate bonds and financings quivered as more deals fell over or were delayed.

But it was figures out yesterday in the US for “durable goods orders” (which last longer than three years) which triggered the sell off. They fell unexpectedly in June (after a fall in May) when cars, planes and trucks are stripped out of the numbers.

Analysts took this to mean that orders from business were lower than they were expected to be, meaning the US economy was soft and perhaps weaker than forecast.

Normally markets would consider, absorb and adapt to that news: it’s not that frightening. But when combined with another slump in new housing sales, the credit crunch, debt market problems and rising uncertainty, markets went south, quickly.

More multi-billion dollar bond offerings are in jeopardy, more big ticket private equity buyouts are being questioned, the $21 billion Coles Myer takeover is poised on the edge as the Wesfarmers share price tanks (and there are no other buyers left) and overnight world financial markets, from stocks, to commodities, took fright and fell around 2.5% to 3%.

The Australian market fell 1% yesterday and the Share Price Index this morning was pointing at a further fall of 152 points on the ASX 200.

Speculators quit markets and currencies: the Australian dollar fell 1.5c overnight to around 86.86 from 88.30 USc on Thursday night.

Only the huge US bond market rose (along with some agricultural commodities such as wheat and sugar) with the yield on the key 10 year bond down to 4.76%, or more than half a per cent under the peak in the bond spike of late May-early June (which set off the current rout) of 5.32%.

We are about to find once again that when the US catches the flu, so do we. China might be a big deal for us, but when it comes to financial stability, the US markets count most.

All those Pollyannas about subprime mortgages had most to protect: while many of the investment banks were trading in the mortgages, selling them, cutting them up and turning them into new securities called CDOs, others were gaily funding the private equity boom, giving the likes of KKR, Blackstone and Cerberus billions and billions of dollars in so-called “bridge” loans and accepting deals with no controls over what was done with the money.

It’s why the likes of German banking giant Deutsche Bank fell 5% overnight, is now down three days in a row, and why its share price is back to where it was in May. It’s why Citigroup, the world’s second largest bank, saw its share price tank yesterday, down 4% as investors worried that it had been stuck, like others, with billions of dollars in unsold and unwanted loans and bonds.

The shares of investment bank (the fifth biggest) Bear Stearns fell 4% yesterday. It was the collapse of two of its hedge funds that punted on CDOs based on subprime mortgages, that was the catalyst for the shakeout and credit crunch now occurring. Bear Stearns yesterday took control of the assets in its failed funds. Its shares have plunged 24% this year, all of it since June.

Bear Stearns was the biggest underwriter of mortgage-backed bonds in the US in the last two years (CDOs). It is now number two this year behind Lehman Brothers whose shares have slumped 17%.

Wall Street saw the Dow down 300 points, (it plunged 440 points at one stage) or around 2.5%, NASDAQ was off 2.9% and the S&P 500 off 3% as worries about subprime mortgages, credit derivatives, the housing industry, poor earnings and a softening economy combined to shake investor confidence.

Our market lost 1% Thursday and will go lower today: Asian markets have yet to feel the selling push. Chinese markets hit a new record yesterday. Europe fell sharply and stock indexes in Argentina, Brazil, Mexico, Turkey and Sweden sank more than 3%. The FTSE 100 in London had its biggest fall in four years.

Gold fell $US11 to $US675 an ounce, oil peaked at $US77.20 before falling to close at $US74.95 and looking weak as financial investors (AKA speculators) bailed out of commodities, as well as stocks and other securities. Copper, nickel, lead, tin and zinc all lost ground. Speculators must be nervy when they sell off gold in times like this. Gold has traditionally been sold as an alternate store of value in times of inflation and instability, not now.

European markets fell by around 3%: the British market fell 3.15%, or 203 points with the combination of the problems with the Alliance Boots buyout (despite some solid earnings reports) and worries that more deals would fail. Germany was hit by worries about Deutsche Bank.

Banks were hit by the failure of the Chrysler and Alliance Boots bond sales and the fact that a dozen investment banks, including Deutsche and JPMorgan, were forced to buy the bonds to make sure the deals completed.

US Government bonds had the biggest rise since December 2004 as investors sought the relative safety of government debt. The S&P 500 hit a 10 month low, only days after reaching an all time high. The Dow passed through 14,000 last week, now it’s down around 5% at 13,400.

Cadbury Schweppes, the British consumer goods group is high on the list of other deals in trouble. It is trying to get the $US15 billion from the two buyout groups bidding for the business: they can’t raise the funding at the moment. Tyco International postponed the sale of $US1.5 billion in bonds because of the turmoil in debt markets.

Investors are also watching the Blackstone Group’s attempts to finance its Hilton Hotels buyout.

The risk of owning corporate bonds also rose after ABN Amro Holding NV’s Australian hedge fund associated (Absolute Capital) suspended withdrawals for three months. That added to concern that fallout from bad subprime mortgages will worsen.

In the US, shares of major homebuilders plunged to the lowest in almost four years after D.R. Horton Inc. and Beazer Homes USA Inc. reported losses totalling $US1.47 billion on lower sales and huge write downs of unsold land and houses.

The US Commerce Department reported that purchases of new homes in the US dropped more sharply than forecast last month.

The backlog of unsold homes rose to its highest level since 1992. That has hammered house builder stocks (down 57% in two years), and led to the collapse of subprime mortgage lenders, the departure of other companies from the industry and tougher lending standards for new borrowers. It’s why sales of existing homes fell again in June and why new housing starts fell 6.6% last month.

And it’s not going to get better. Not only did Countrywide Financial, the biggest mortgage lender in the US say this week that housing would not recover until 2009, its been joined by another group with a similar forecast.

According to an analysis released Thursday by Moody’s Economy.com, 2.5 million first mortgages will default this year, meaning there’s little chance for improvement in the US housing market this year, or next.

It expects delinquencies to peak in the summer of 2008 at 3.6% of all outstanding mortgage debt, up from 2.9% in the first three months of 2007.

There won’t be any easing in the default rate until 2009. Driving these defaults will be subprime mortgages and better-rated housing loans which have been sold with so-called ARMS (Adjustable Rates Mortgages) which mean the interest rates jump sharply in the second or third years to levels many people cannot afford. That forces sales or defaults.