credit update 12 10 07

The Asian stocks have hit soprano levels yesterday with the Nikkei up 1.64%, Hang Seng 1.97%, All Ords up 0.52% and Straits Times up 1.61%. Meanwhile, the Asian credit benchmarks halted their decrescendo to end barely a whimper from the levels charted the day before.

Australia's unemployment rate dropped to 33-year low of 4.25% in September, underscoring the country's strong economic fundamentals but at the same time spurring expectations of a rise in interest rates. The Reserve Bank of Australia previously raised interest rates to an 11-year high of 6.5% in August in response to surging growth and rising inflation.

As widely expected, the Bank of Japan kept its key interest rate unchanged as it takes more time to assess the extent of the credit market turmoil and the prospects of a slowdown of the US economy. The BOJ has intimated its readiness to "normalize" (increase) rates once it determines that the US economic slowdown will be limited. This comes as Japan's current account surplus jumped 42.1% year-on-year in August and as Moody's raised rating on yen-denominated sovereign debt to A1.

The rally of US technology stocks of recent days lost steam after a frantic sell-off dragged the NASDAQ down 1.4%, while the S&P 500 fell 0.5% and the Dow Jones Industrial slid 0.5%.

The US housing sector, the locus of the US subprime turmoil, sees home foreclosure filings doubling last month from a year ago; there is also an upsurge in late payments and a drop in home sales, all of which suggest of the mortgage crisis not abating. Moody's lowers rating of home builders Centex, Lennar and Pulte Homes to Ba1. The ratings agency sees no improvement in the US housing market until 2009 at the earliest. A whiff of fresh air comes from data revealing US trade gap has shrank in August on the weakening dollar beefing up export sales, as well as from a drop in claims for jobless benefits.

The US seeks relief from the World Trade Organization on the alleged deficiencies in China's legal regime for protecting and enforcing intellectual property rights of American music, movies and publications all of which are being undermined by rampant piracy.

Asian stocks are mostly in the red this morning as investors look to locking in some of yesterday's gains.

credit update 11 10 07

The Asian bourses ended mixed yesterday with the Nikkei 225 up 0.10%, Hang Seng up 1.21%, All Ords up 0.85% and Straits Times down 1.33%. Meanwhile, the Asian credit benchmarks continue to improve with the iTraxx Asia ex Japan 3.33bps tighter. The past days saw a general strong running in the Asia equity markets with new highs set in China, Hong Kong, South Korea, India, Indonesia and Australia.

To stave off the ripples of the US subprime crisis and credit squeeze in the financial system, Russia's central bank is set to lower the minimum reserve requirements for banks while also accepting banks' credits as collateral for loans for the first time. Observers warn that refinancing demands could rise to $12bn -$15bn per day in October and November. Fitch downgraded the rating of Russian Standard Bank, Russia's top consumer lender, BB to BB-.

The Bank of Japan is to set the key interest rate today, widely expected to keep the rate at 0.5%. Although some quarters are clamoring for an increase in interest rate to ease the pressure on yen to weaken.

US technology stocks rose but profit warnings from blue chip names dragged the Dow Jones Industrial down 0.61% and S&P500 down 0.17%.

credit update 10 10 07

Most of the Asian bourses edged up yesterday with the Nikkei up 0.56%, Hang Seng up 1.65%, All Ords up 0.31% and Straits Times up 1.19%.

Asian credit benchmarks registered general improvement with the iTraxx Asia ex Japan 1.69bps tighter.

UK's Financial Services Authority admits that its monitoring of the troubled Northern Rock was inadequate, revealing further regulatory weaknesses of the financial system. In particular, the trifurcation of responsibilities between the Treasury, Bank of England and FSA has potentially made it more complicated to take decisive action. Meanwhile, the Bank of England dampened market expectations of a rate cut when, although acknowledging the current financial market turmoil is not yet over, it said it will not set rates to "insulate the banking system from the repricing risk," underscoring more the threat of inflation to the economy.

The release of last month's Fed meeting minutes lifted US stocks with the Dow Jones Industrial up 0.9% and S&P500 up 0.8%. The CBOE volatility index retreated 7.67%. The report whetted market expectations of further rate cuts before the end of the year.

In response to the recent spate of Chinese-made product recalls, US legislators decree to raise fivefold the fine leviable against makers of unsafe products. This is part of efforts aimed at increasing inspections and tightening rules governing imported products.

Standard & Poor's downgrades the sovereign credit rating of Kazakhstan to the lowest investment grade category due to the country's difficulty in refinancing maturing international debt, waning domestic depositor confidence, falling international reserves and other woes in its financial system. Despite this, the ratings agency said its long-term outlook for the country is stable. On the other hand, S&P said it will not cut India's credit rating based solely on the schism over the proposed nuclear agreement with the US.

Singapore's economy grew 6.4% in the third quarter, higher than expectation, driven by increased manufacturing output and robust financial services. The city-state is ranked as the world's most business-friendly economy for two years in a row. Economists however warn of the increased risks of inflation.

credit update 09 10 07

Asian bourses ended mixed yesterday with Hang Seng down 0.22%, All Ords up 0.75% and Straits Times down 0.06%. Meanwhile, the Asian credit benchmarks clinched moderate improvement with the iTraxx Asia ex Japan 1.58bps tighter.

US stocks finished mostly lower with the Dow Jones down 0.16% and S&P 500 down 0.32% in a quiet trading session yesterday as many investors waited on the sidelines for the quarterly corporate earnings reports. The reports are expected to give insight into the fourth quarter, which most market participants predict will bring more robust growth.

As if it was not obvious, a study revealed that financial regulators are partly to blame for the knock-on effects of the US subprime mortgage market crisis. It adds that regulators' reliance on information requirements, codes of conducts and certificates of aptitude had "fostered an illusion of confidence" between suppliers of complex financial products and investors." It warns that current EU rules on insurers could exacerbate the situation, urging regulators to re-think their approach to complex financial instruments.

Meanwhile, EU finance ministers, cognizant of the role of ratings agencies in the whole subprime brouhaha, are gearing to draw up proposals to improve the transparency of financial markets and to change the way credit ratings agencies operate. One such proposal will address the perceived conflict of interest by forcing ratings agencies to separate their rating business from their consulting business. Another is to compel ratings agencies to provide not only creditworthiness ratings but also for liquidity risks and limiting the use that public institutions such as central banks make of ratings. There is also some undertones about securitisation being a subject to a sort of standardization to limit complexity of instruments. In sum, more stringent regulations are in the pipeline.

European finance ministers have reiterated its call for China to allow the yuan to appreciate against the euro. Europe's trade deficit with China jumped 22% to a record in the first half of this year, a stark reminder that China's currency revaluation in 2005 has failed to curb the trade imbalance between itself and the eurozone. Meanwhile, observers interpret the ministers' remark that Japan's economy "is on a sustainable recovery path," as a subtle call for the yen to likewise appreciate.

The Australian ANZ bank has decided against selling its wholesale mortgage distribution business after failing to attract a fair price for the division due to volatility in the global debt markets, an indication of the continued ripples from the US subprime mortgage crisis in Australia.

Ahead of Bank of Japan's Oct. 11 meeting, economists expect that it will leave its benchmark rate unchanged at 0.5% as it keep watch for more decisive signs of where the economy could be heading vis-à-vis the lingering threat from the US market slowdown, waning sentiment of small firms and falling domestic consumption.

RBS wins ABN battle with its € 71bn (£49bn) mostly-cash offer. Whether the deal is a Midas or a Pyrrhus for RBS remains to be seen.

credit update 08 10 07

Asian stock bourses ended mixed last Friday with the Nikkei down 0.16%, Hang Seng up 3.18%, All Ords up 0.57 and Straits Times up 1.03%

The iTraxx Asia ex Japan widened 3.51bps while the other Asian credit benchmarks chalked moderate tightening.

US stocks rallied Friday led by financials sending the S&P 500 up 0.96% and Dow Jones Industrial up 0.66% after the US Labor department reported an increase of 110,000 jobs in September and revised the August loss of 4,000 to an increase of 89,000 jobs. The robust jobs market data whetted investors' belief that the US economy remains resilient despite the credit market turbulence.

The Financial Times reports that JP Morgan is likely to unveil mark-to-market losses on leverage loans of about $1.4bn and a further $700m of writedowns on mortgages and mortgage-backed securities for a total of $2.1bn, while Bank of America is estimated to be hit with losses from leveraged loans of $700m and mortgage writedowns of $300m. Thus far, the casualties are as follow: Merrill Lynch, $5 bn, UBS $3.7bn, Deutsche Bank $3.1 bn and Citigroup $2.7bn.

Former Fed chief Alan Greenspan said US economic growth is slowing but the odds of a recession is less than 50%.

credit update 05 10 07

Stressing the downside risks to growth in the eurozone, the ECB left its key interest rate unchanged at 4% and indicated that there are no plans for interest hikes in the near future. Meanwhile the Bank of England left rates at 5.75%, being more circumspect in assessing the credit squeeze in the context of growth and inflation. Both central banks' move had been widely anticipated. The two central banks' dilemma in their decision has been the risk of inflation vis-a-vis the heightened downside risk to growth stemming from the market ructions in recent months.

The consequences of the Northern Rock episode is beginning to take its toll on the sterling with observers saying that the yen carry trade will unwind given the increased possibility of BOE's cutting interest rates next year. With the 5% interest rate spread, sterling has been one of the currencies preferred in the yen carry trade. With the increasing threat of a slowdown of the UK economy, lower interest rates become more plausible. This could boost emerging market currencies, many of which are under pressure to break their dollar pegs.

British Land, UK's second largest property company, falls victim to the credit crunch when it withdrew the sale of part of its £1.6bn shopping centre Meadowhall, because of "uncertainty in the financial markets" which had made it "unlikely" to achieve the desired price.

The US stock markets had a lull before the storm yesterday with the S&P 500 up 0.21% and Dow Jones up 0.4%, as investors shy away from making big bets before the jobs data is out today. Many say that the data could shed light on the economy and the outlook for interest rates.

Bear Stearns, one of the hardest hit by the collapse of the subprime mortgage market said it will "weather the storm" and isn't looking for cash infusion from an outsider investor. It adds that "things are getting better" since the Fed's rate cut last Sep 18.

The US commercial paper market has expanded for the first time in eight weeks, an incipient sign that short-term investors may have begun to regain their appetite for risk.

Asset-backed commercial paper continued to decline, but the pace of contraction slowed. Observers however say the asset-backed market will not recover in the foreseeable future because investors are likely to be reluctant in buying any asset-backed debt tied to mortgage.

The Asian stocks advance as crude oil prices rose for the first time in five days and the weaker dollar helped boost demand for gold.

credit update 04 10 07

Due to increased risk of defaults from slump in the home prices, Fitch Ratings cut the credit ratings of $18.4 bn of bonds backed by subprime mortgages issued last year. The downgrade represents 11% of the entire $173 bn of securities from 2006 that were rated by Fitch. This comes in the wake of criticisms that ratings agencies had been remiss in the subprime episode.

US Mortgage Bankers Association said that mortgage applications volume fell by 2.7% in the week ended Sep 28, reflecting a drop in demand for refinancing loans.

Most economists believe that the Bank of England will keep its key interest rate pegged at 5.75%. BOE will be announcing its decision at noon of London today.

Deutsche Bank announced that it expected to write-down $3.1 bn in loans and mortgage-backed assets. The losses will dampen third-quarter performance but added that it's still on track to achieve its profits target for the fiscal year.

Led by technology companies, US stocks tumbled with the S&P down 0.5% and Dow Jones down 0.6%, after Morgan Stanley told investors to sell shares of Intel Corp and Advanced Micro Devices, adding that a glut may lead to a price war between the two biggest producers of computer processor.

Vietnam delivers a blow to the dollar when it announced its plan to cut its purchases of US Treasuries and other dollar bonds, in a move to gradually move to a floating currency. With inflation hitting 8.8%, it will abandon its policy of holding down the domestic currency through large purchases of dollars. But Vietnam's $40 bn reserves is not what worries some economists but Asia's $3.58 trillion, $1.34 tn of which is held by China, should the other Asian countries should follow suit.

There are lots of cross currents resulting in optimism some days and frenetic sell offs on other days and one could literally pick one set of data to be either.