After months of speculation within professional circles, the US stock market has finally woken up to the crippling mortgage situation in the sub-prime sector.  Despite very down beat comments from a host of market professionals and the chairman of the Federal Bank, the stock market had (until this week) been enjoying a very lucrative run.  So what happened?

The catalyst for the recent sharp pull back in stock prices seems to have been prompted by more high profile mortgage default numbers, the withdrawal of some major players from the sub-prime mortgage sector and the news that some 1 million US home owners are struggling to cover their mortgage payments.  The US housing market (and the economy, after the knock on effect) is under serious pressure, and while the authorities will act to soften the blow, the situation will not be resolved over night.

As many investors and market observers fear that the economy may stall, we have seen the evaporation of takeover speculation in the market, with money expected to get tighter and a reduction in estimated investment returns.  These are markets which are not favourable to some of the high debt takeovers which have been mentioned of late.

It will be interesting to see how the markets react this week, and whether investors will be able to convince themselves that this is not a major issue.  However, it is an issue which will not go away, now that it has begun there will be serious consequences at some point.