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.

credit update 03 10 07

Japan's new prime minister Yasuo Fukuda vowed to pursue economic reforms "in order to create a more mature society," and with it are "sweeping" changes in the tax system, including a posssible rise in the country's consumption tax.

With foreign firms itching for a slice of its huge market, China has opened its gate but not wide enough. Overseas companies will only be allowed to own stakes in publicly traded brokerages and still subject to a 20% cap, effectively preventing foreign investors from taking control. Foreign firms are not licensed to set up their own brokerages in China.

Morgan Stanley reveled that it will cut 600 jobs in its global mortgage business, saying that it will reduce the size of its business to a " level appropriate to the existing market."

The US subprime contagion hits the Spanish shore with Valencia's property developer Llanera declaring insolvency after failing to meet payments on €748m of debt. Almost 800,000 homes were built in Spain last year, 300,000 of which remain unsold.

The wave of optimism in recent days could prove fleeting as some economists warn that a large number of adjustable rate mortgages (ARMs) will soon be resetting, which could trigger yet another round of foreclosures, which in turn, could set off another bout of market tremors.

Asian stocks are on the rise this morning. Citigroup offered to buy the rest of Nikko Cordial it doesn't own while Nomura Holdings and Westpac Banking Corp agreed to provide funding and buy Rams Home Loans Group's branch network.

credit update 02 10 07

The Asian stock markets ended mixed yesterday with the Nikkei up 0.36%, All Ords down 0.02% and Straits Times up 1.32%. Japan's Tankan index charting a near two-year high fuelled the surge in Japanese stocks while Singapore's surge in home loans fed the gains of banks, DBS and others.

The Asia credit benchmarks remained stable with the iTraxx Asia ex Japan tightened by 0.14bps.

UBS reported $3.4 billion in losses due mainly to securities linked to the US subprime mortgage sector while Credit Suisse said it would be "adversely impacted" by the market turmoil but would remain profitable. In the other side of the Atlantic, Citigroup warns of a 60% drop in quarterly earnings stemming from $5.9 billion in losses and write-downs from subprime and leverage loan woes, fixed income trading, as well as weakness in its consumer business. Citigroup, however, expects the bank to "retun to a normal earnings environment in the fourth quarter."

Despite the profit warning from Citigroup, US stock markets advanced with the S&P up 1.33% and Dow Jones up 1.38% as investors are on renewed optimism that the worst of the credit squeeze is over. Keen on the vicissitudes of the markets, some obeservers however say this may not be so. Currently, there are snippets of reports circulating that Deutsche Bank is hit with a 1.7 bn euros ($2.4 bn) loss from loans that have dwindled in value as a result of the credit market crisis.

Ahead of the Reserve Bank of Australia's board meeting today, most economists predict that it will keep its benchmark rate unchanged.

credit update 01 10 07

The Asian bourses ended last week mixed with the Nikkei down 0.28%, Hang Seng up 0.29%, All Ords up 0.50% and Straits Times down 0.23%.

The Asian credit benchmarks remained stable with a slight 0.5 bps widening of the iTraxx Asia ex Japan.

ECB President Jean-Claude Trichet said that "transparency vis-a-vis investors and savers, transparency vis-a-vis surveillance authorities, appears to be the best vaccine against contagion," with obvious reference to the ongoing financial turmoil around the world sparked by the US subprime mortgage crisis. He points that a well struck balance between correct judgment and speedy action is key.

After the sound and fury about protecting ordinary savers, UK Chancellor Darling gave way to pressure from banks and insurers and has pledged to guarantee only the first £35,000 of savings instead of the proposed £100,000. The banks said that Alistair's proposed £100,000 guarantee would distort the market by unduly encouraging the people to put their money into savings accounts rather than investment products. Meanwhile, the UK Treasury has given the go-signal for two American hedge funds, JC Flowers and Cerberus, to enter takeover talks with Northern Rock's board. The Treasury has effective control of Northern Rock through the Government's funding lifelines to the struggling bank.

China has set up Asia's largest state-owned investment company, designed to invest more aggressively a portion of its burgeoning $1.33 trillion foreign exchange reserves. China Investment Corp., with its initial $200bn, started operation last week. Attendant to its creation are speculations of a flood of Chinese investments into overseas companies and resources such as oil and metals.

Reports abound that Swiss bank UBS is expected to announce a fixed-income portfolio writedown of more than $2.6 billion, putting its third-quarter loss at the vicinity of $510 million to $600 million, making it the biggest casualty so far of the ructions in the credit markets. The bank's losses stemmed from the application of conservative market values to asset-backed bonds.

Bank of Japan's quarterly Tankan survey revealed that sentiment among its largest manufacturers unexpectedly stayed near a two year high at 23 points as exports expanded. The weakened yen and increased overseas demands saw profits surged for Toyota and Canon and other Japanese manufacturers.

US workers filing new claims for unemployment aid fell by 15,000, the second straight weekly decline. This resilient employment figure with bleak housing sector gauges are sending mixed signals, confusing the financial Nostradamuses who are on the lookout for incipient signs of where the economy is heading in the near future. One thing is certain, data and statistic ostensibly indicating the near future should be taken with a grain of salt.

credit update 28 09 07

Markets are still awash with speculation that Bear Stearns is whisker away from closing a sale to Warren Buffet or other potential investors. Names such as Bank of America, Wachovia, and two Chinese companies Citic Group and China Construction Bank have all been floated as potential investors.

The Organisation for Economic Cooperation and Development, one of the world's leading economic authorities, has called for the Bank of England to cut interest rates in the face of the growing threat to UK's economy from the credit crunch and the slumping housing market. Meanwhile, the British Bankers' Association has joined the chorus of voices calling for changes in UK's regulatory system but called for temperance lest inappropriate palliatives are enacted instead of meaningful reforms. It also called for the BOE to re-examine its emergency overnight lending facility, and the list of eligible loans be widened. It also expressed concern over the proposal to overhaul the deposit compensation scheme which could increase the compensation ceiling from £35,000 to £100,000.

A Goldman Sachs report warns of a likely recession in Japan and risks of the US housing slump spreading to parts of Europe, adding that Asia and Europe may not be robust enough to prevent global growth from slowing should the US falter.

Japan's Ministry of Economy, Trade and Industry reported a 3.4% surge in industrial production in August as exports rose in the aftermath of the July earthquake. Despite this and a BOJ's member saying the US housing slump will have a limited impact on Japanese exports and that the world economy will keep expanding even if US growth slows, some observers, however, still believe that a tumbling US economy will adversely impact Japanese exports. The International Monetary Fund warned this week that world growth will slow down in 2008 because of the credit shortage stemming from the US subprime turmoil.

In an effort to curb inflating property prices, China raised interest rates on some mortgages and increased minimum down payments. The government is concerned that a surge in lending is creating a bubble, with real estate development jumping 29% in the first eight months of 2007.

A report published by World Bank and the International Finance Corp, named Singapore as the world's most business-friendly economy based on ease of doing business. New Zealand was second, US was third and Hong Kong was fourth.

credit update 27 09 07

A business lobby group lambasted the UK regulatory system for its failure in the Northern Rock crisis, saying that "a run on a bank is something that happens in a banana republic." At the same time, it called for a revamp of the entire regulatory regime but warned against heavy-handed regulation that would stifle competition and innovation. Meanwhile, takeover initiatives of Northern Rock are in their early stages as Chris Flowers, through his private equity firm JC Flowers, has been given access to Northern Rock's books after submitting a takeover proposal for the bank. JC Flowers' offer would keep the bank together while other potential bidders plan to break the stricken lender up and divide the assets between them. No price has yet been proposed.

A breath of fresh air for Bear Stearns as reports surface that several investors, including Warren Buffet, have expressed interest in buying part of the bank. Bear Stearns is among the hardest hit of the subprime mortgage turmoil with its two hedge funds going bust and third-quarter profits declining 61%. Bear Stearns, however, said the worst is over.

Observers of the dollar fear the possibility of Saudi and other Middle-East shiekdoms cutting their currencies' peg to the US dollar. Many of these countries are recently under inflationary pressure from rising oil prices and local construction boom which would normally necessitate an increase in interest rate to keep inflation in check. Basic economic differences between US and these countries could perforce break their dollar peg, adversely affecting the US dollar.

The two-day strike by the United Auto Workers Union of General Motors ended in a groundbreaking agreement which takes $50 bn of future health-care obligations off GM's books and may transform the competitive landscape of the US auto industry.

The US Securities and Exchange Commission has initiated an investigation specifically to examine whether credit ratings agencies had "compromised their impartiality" when they rated various mortgage-backed securities and at the same time provided advice to firms on how to package them so as to get higher credit rating. Another point of contention is the ratings' agencies receiving of fees from the investment firms and the potential conflict of interest it creates.

credit update 26 09 07

There appears to be a silver lining in the nimbus affair of the Northern Rock as officials of the beleaguered bank have intimated that a number of possible bidders have already approached, whetting the possibility of an offer being made. However, observers urged caveat venditor as "no price has been referred to" by the potential bidders and some of these could be from opportunists trying to cherry pick the mortgage portfolio. Meanwhile, Northern rock cancelled its £59m interim dividend due to be paid next month.

Inchoate probes on the ratings agencies' alleged role in the subprime mortage crisis have taken on a more definite shape with tightened regulation as seven of the world's leading credit-ratings agencies will have to submit themselves to the regulatory oversight of the US Securities and Exchange Commission. Attendant to this, all of the ratings agencies will have to disclose their methodologies and procedures in assigning ratings, as well as certain performance measurement statistics such as historical downgrades and default rates. It is to be noted that these ratings agencies have taken flak from various quarters with their alleged culpability in the subprime debacle as they assigned high credit ratings to complex and tenuous instruments.

The backlash from investors squeezed by collapsing firms amid the credit turmoil is in the offing. Law firms are gearing up for a slew of cases to be hurled at companies going bust in the subprime brouhaha on allegations of fraud and negligence. Earlier this month a class action against one of two Bear Stearns hedge funds that collapsed is being organized.

An incipient effect of the interest cut by the US Federal Reserve is a 40% increase in the number of customers inquiring about their home financing options as revealed by Countrywide Financial Corp, the largest US mortgage lender. Countrywide and other housing firms are stepping up efforts in marketing as the number of customers shopping for homes may start to pick up.

As enunciated in China's five-year plan that runs through 2010, it aspires to become a center of high-quality production, emulating the example set by Japan with the latter's relentless focus on quality and continuous improvement making Japanese companies and products trusted by global consumers. With China buffeted by a wave of recalls stemming from alleged dodgy, sometimes poisonous products, although a small percentage of Chinese exports, has done considerable damage to its reputation. China is set to do a herculean task of convincing the world that its products are safe.

Asia credit benchmarks iTraxx Australia and iTraxx Asia ex Japan tightened 0.56bps and 4.12bps respectively, while both Japanese credit indices remained stable.

Asian bourses are mixed as of this morning. Hong Kong is on holiday.

credit update 24 09 07

Although Friday saw a moderate dip with the Nikkei down 0.56% and All Ords down 0.46%, the Asian bourses rose last week after the US Federal Reserve slashed its benchmark rate by half a percent.

Reeling from the Northern Rock debacle, the Bank of England admitted that it stand in need of improving its understanding of developments in the markets for money and credit to be able to formulate relevant monetary policies. The bank has recently come under fire over its handling of the Northern Rock crisis, on which it allegedly failed to act promptly to stem a full-blown crisis. Meanwhile, Chancellor Alistair Darling supports measures for customers to get up to £100,000 of their deposits within days of a bank going bust. Opposition however warns a Government guarantee such as that of the Northern Rock deposits could become a ''crooks' charter in which any dodgy bank will be able to lure in depositors with attractive interest rates, expand rapidly using Northern Rock's business model and then call in the Government when it hits trouble."

Markets around the world watch for the ripple effects this week of the Fed's half-point interest cut.

Yasuo Fukuda becomes the Japan's next prime minister after being chosen this Sunday by Japan's governing Liberal Democratic Party. He is inheriting as wobbling Japanese economy as there are still lingering concerns that a slowdown in the US housing market will cause consumption to decline and which could lead to a drop in Japanese exports. Japan's second quarter gross domestic product saw negative growth and the consumer price index has declined on the year for six straight months.

Underscoring China's key role in its business, Mattel, the world's largest toymaker, apologized for damaging China's reputation after recent large recalls of its Chinese-made toys, admitting that it targeted some goods that actually met the company's standards.

China is planning to introduce rules to allow a handful of foreign investment banks to invest in joint ventures with local securities firms. In the planned pilot programme, China would allow small number of foreign firms to acquire 20 per cent stakes in existing Chinese brokerages. Foreign investment banks would be allowed to own up to 33 per cent of a new securities industry joint venture with a local partner. Several foreign investment banks are hoping to gain access to the Chinese market, which is undergoing a massive boom in new listings.

Credit analysts are hopeful that turbulence in the overseas credit markets would draw investors to the region, strengthening the Asian credit market. They note that Asian credit's lower correlation with the rest of the world could spur a pick up in volumes as investors turn to Asian credits for diversification.

HSBC closed its non-core wholesale lending business, Decision One Mortgage, costing $880m in charges and additional $65m after-tax restructuring cost with around 750 employees affected.

credit update 21 09 07

Bank of England Governor Mervyn King blamed the pastiche of legislations in the UK and European Union for the bank's inability to act properly and swiftly on the Northern Rock debacle. Chancellor Darling believes that the Northern Rock episode could have been prevented had BOE agreed to accept mortgage collateral at its lending window earlier, similar to what the Fed and ECB did. BOE officials, however, insist that this would not have made any difference since the root of the problem was Northern Rocks' over-reliance on short-term funding in the capital markets.

In his testimony before the House Financial Services committee, Fed Chairman Bernanke called for a better regulation of mortgage lending practices, particularly better disclosure and more uniform enforcement of rules in the fragmented market structure of brokers and lenders.

Bear Stearns said its third-quarter plunged 61% form the collapse of its two hedge funds in the subprime mortgage crisis storm. This contrasts sharply with the superlative performance of Golman Sachs which posted a 79% rise in third-quarter profit, despite of a $1.71bn write-down.

credit update 20 09 07

Most Asian stock markets rallied with the Nikkei up 3.67%, Hang Seng up 3.98%, All Ords up 2.48% and Straits Times up 3.35% at yesterday's close. The rate cut in the US and the Bank of Japan's keeping the overnight lending rate at current level lifted market sentiments and saw surge in Japanese shares led by Mitsubishi UFJ Financial and Toyota Motors.

As widely anticipated, the Bank of Japan kept the interest rate pegged at its current level. BOJ officials say that they do not see at the moment a need to radically change their forecast of 2.1% growth in the fiscal year. The decision was not unanimous, with one of its nine members calling for a rate hike. The split is seen by some that the central bank will still seek gradual rate hikes in the future.

The subprime mortgage lender Accredited Home Lenders Holding agreed to be bought at a lower price by Lone Star and to drop a lawsuit against the private equity firm. The lawsuit pertained to Lone Star's attempt to back out of the merger agreement after market conditions for mortgage lenders deteriorated. Meanwhile, Absolute Capital Management, a UK hedge fund, halted withdrawals of investors after seven of its eight funds "contain quoted investments which the board believes are not immediately realisable at their stated values due to their illiquid nature."

Morgan Stanley is hard hit by the credit cruch as it reported a 17% drop in profits in the last quarter. It also took a $940m write-down the value of its loans.

US stock market extended its rally for the second day with the S&P 500 up 0.61% and the Dow Jones Industrial up 0.55%.

credit update 19 09 07

The US Federal Reserve slashed the benchmark interest rate by a hefty half point to 4.75% in a so-called pre-emptive strike aimed at neutralizing the threat to the broader economy from the US housing market fallout. It adds that the central bank will ``act as needed to foster price stability and sustainable economic growth.'' The efficacy of this bold move remains to be seen as its effects percolate through the economy. Wise or otherwise, it is premature to say.

Lehman Brothers' quarter earnings fell 3.2% on writedowns linked to mortgage and leverage loans but the fall is below what investors were expecting. Lehman said the worst of the credit correction was over, helping soothe concerns that the US subprime mortgage crisis would hit hard on investment bank earnings. Some say that Lehman's being well diversified is what cushioned its earnings from the subprime hit, adding that those not well diversified like Bear Stearns which is also to report earnings this week may not fare as well.

A day of calm saw the shares of Northern Rock and other banks recovered ground with the UK government's guarantee helping stem the tide of frantic withdrawals and soothe market jitters. Despite this, analysts do not expect the banks to return to the levels they traded at before the Northern Rock crisis. The respite could be fragile and a whiff of negative news could easily send shares tumbling down again.

RealtyTrac's US Foreclosure Market Report found that the number of foreclosure filings 36% in August from July and 115% from a year ago, adding that the jump in foreclosure may just be the beginning as a large number of subprime adjustable rate loans (ARMs) are starting to reset now at higher rates.

US stock markets soared with the Fed announcement with the S&P 500 jumping nearly 3% and the Dow Jones Industrial up 2.5%.

credit update 18 09 07

Except for China, many of the major Asian bourses dipped yesterday with the Hang Seng down 1.20%, All Ords down 0.51% and Straits Times down 1.70%.The US Justice Department's investigation on the alleged 'anti-competitive practices' of makers of flash-memory chips sent Samsung Electronics, worlds biggest NAND flash memory maker, and others tumbling down while falling crude prices drove down oil producers BHP Billiton, Woodside Petroleum and PTT Pcl.

The Asian credit benchmarks posted a slight tightening, with the iTraxx Asia ex Japan 2.5bp tighter.

In an effort to stanch the frenetic withdrawals by Northern Rock depositors, UK finance minister Alistair Darling said if necessary the government and the Bank of England would guarantee all existing Northern Rock deposits during the current instability. Shares of other banks fell as investors fear these banks could be in the same funding predicament as Northern Rock. The current controversy is regarded as an incipient sign of a wider economic ramification in the offing. Former Fed Chairman Alan Greenspan warned that UK may even be more exposed to a property slump and consumer debt crisis than the US.

Contrary to prognosticators at the onset of the subprime crisis saying the credit world as we know it is coming to an end, Greenspan believes that credit default swaps, CDS, are here to stay and have demonstrated their capacity to diversify risk. He added, however, that collateralised debt obligations (CDO) volumes "will never get back to the levels and structures that they were, because now everybody knows you cannot price them." But this is an absolute statement, and if we are to believe that Greenspan is an heir to Ayn Rand’s philosophy of “reason as the only absolute…” =)

While voices from many sectors clamor for more stringent regulations in the financial system, US Treasury Secretary Henry Paulson called for temperance in the introduction of new regulation, realizing that the current situation is conducive to hastily introduced measures which in the long-run could be counterproductive. With many regarding the multifarious financing techniques and innovations as contributory to the excesses of the subprime mortgage lending, Paulson does not discount the benefits from these and thus calls for a balance between regulation and innovation.

While the US grapples with its burgeoning trade deficit with China, Europe's trade deficit jumped 22% in the first half of the year. Imports from China increased to 78.5 billion euros ($108.9 billion) while exports rose to 28.1bn euros, in the first six months of the year.

All eyes on the Fed today when it releases its decision on interest rate.

In a day of light trading, the US stock markets dipped with the S&P 500 down 0.51% and Dow Jones Industrial down 0.29%. Bad news from Northern Rock in the UK, Merrill Lynch's job cuts and Greenspan's warning of the possibility of recession dampened market sentiments.

Many of the major Asian stock markets are in the red this morning.

credit update 17 09 07

Asian stock markets stepped up Friday's close with the Nikkei up 1.94%, Hang Seng up 1.47%, All Ords up 1.14% and Straits Times up 0.91%. The Asian credit market benchmarks chalked a general tightening with the iTraxx Asia ex Japan edging 1bp tighter.

Bank of England's bail-out of Northen Rock sparked a fresh round of debates on the role of central banks. This came only two days after BOE Governor Mervyn King said that intervention would "encourage excessive risk-taking, and sows the seeds of a future financial crisis" For some, this is exactly what the BOE has done in granting funding to the beleaguered firm, prompting critics to label BOE as a paper tiger. Some say that had BOE not been hesitant to inject liquidity into the system, it would have no need for a turnabout.

The dust has hardly settled on the Bank of England's bail-out of Northern Rock that rumours are afloat that several high street names and European Banks are circling around as Northern Rock becomes a potential target for takeovers.

Alan Greenspan, in his memoir "The Age of Turbulence: Adventures in a New World," criticized the Bush administration for putting political imperatives ahead of sound economic policies. Some, however, put a part of the blame for the current financial woes on Greenspan himself for being too eager to cut rates. The eponymous "Greenspan put" had allowed for credits to be too cheap, setting up the stage for the hamartia called US subprime crisis.

The Financial Services Rountable, a group representing the 100 largest financial services firms in the US, adds its voice to the chorus of those calling for a better regulation of the US financial system. Aiming to boost competitiveness of the US capital markets, it propounds a "principles-based" approach to regulation. It adds that such system might have helped identify problems with the subprime mortgages sooner.

The markets wait for the figures from Morgan Stanley, Goldman Sachs, Bear Stearns and Lehman Brothers this week. The markets are particularly anxious about their reports as they are expected to be among the hardest hit on their heavy exposure to US mortgage-backed securities. However, some doubt whether the figures will provide accurate picture given the relative discretion allowed by accounting rules, particularly in marking to market trading assets. Meanwhile, Merrill Lynch in its regulatory filing with the Securities and Exchange Commission disclosed a significant markdown on assets such as mortgage-backed securities, leveraged loan commitments and collateralized debt obligations in their third quarter earnings.

The friction between China and the US over trade heats up as China threatened US with litigation in the World Trade Organization on the imposition by the US of it so-called "countervailing duties" on China's paper exports.

Barclays shareholders approved the company's bid for ABN AMRO on Friday.

credit update 14 09 07

Many of the major Asian bourses posted modest gains yesterday with the Nikkei up 0.15%, Hang Seng up 0.93% and All Ords up 0.14%.

The Asian credit benchmarks remained unruffled yesterday with the iTraxx Asia ex Japan 0.31 bp tighter.

Observers in China say that raising interest rates, which the central bank has already done so five times so far this year, is not enough to stem inflation. According to them, China needs to fast track the appreciation of the yuan. With China's widening trade surplus, 33% in August from a year earlier, yuan's appreciation will increase export prices and ease money inflows.

The turbulent politics and stalling economy of Japan, reinforce market expectations that the BoJ will leave its key overnight lending rate at 0.5 percent on Sept. 19. The Japanese economy contracted 1.2% in the second quarter with depressed corporate investment and reduced consumer spending. Sporadic statistics such as the surge in machinery orders hint of a silver lining on the nimbus of economic contraction.

Northern Rock, one of Britain's large mortgage lenders, becomes the highest profile UK casualty of the so-called credit crunch as it was impelled to borrow emergency funding from the Bank of England. The US subprime mortgage crisis drained liquidity from the money markets which Northern Rock borrows from, sending the company cap in hand on the doors of the Old Lady of Threadneedle.

The role of the ratings agencies will face scrutiny as European Union finance ministers in meet Portugal. In response to the current crisis, the meeting aims to establish regulatory agreement to help maintain global financial stability and transparency in the banking system. They will also examine regulation of banks' off-balance sheet investment vehicles which is the crux of the present ructions.

US Stocks advanced with the S&P 500 up 0.84% and the Dow Jones industrial up 1%. Market sentiment got a lift from announcement Countrywide Financials, the largest US mortgage lender that it had lined up $12 billion in additional financing. The Federal Reserve added a positive note when it said the outstanding volume of commercial paper fell by a much smaller amount this week than in the previous four weeks, a nascent sign that the corporate short-term commercial paper market could be stabilizing.

The Asia stock markets look set to end the week on a positive tone with the Nikkei up 1.13% and Hang Seng up 1.02% late this morning.

credit update 13 09 07

The Asian stock markets ended mixed yesterday with the Nikkei down 0.50%, Hang Seng up 1.49%, All Ords down 0.20% and Straits Times up 0.33%.

The New Zealand central bank left the interest rate unchanged at the high 8.25% amidst growing inflationary pressures and with the impact of the global financial turbulence still unclear. It expects the economy to grow over the next two years, beefed up by rising prices for dairy products and other commodities, but caveats that the global financial market convulsions could adversely affect the economic outlook for its trading partners such as the US.

In an effort to increase corporate debt trading, China is set to relax its control on investment by insurers and allow them to buy unsecured corporate debt. It will also let banks trade corporate bonds of publicly traded companies on both the interbank market and the securities exchange.

The dollar weakened to near its all-time low $1.3914 versus the euro on signs the U.S. economic growth is slowing. Analysts expect the dollar to continue falling as they wait for a rate cut by the Fed.

US Treasury Secretary Henry Paulson called on lenders to expand the range of mortgage products to refinance loans made unaffordable by resets. Adding a human face to the subprime crisis, Paulson underscored that "we're focused on homeowners where it's their primary residence, finding ways to keep them in their home." He urged mortgage financing companies to identify and offer refinancing and other assistance to troubled borrowers facing big rate resets.

There is divergence among central banks on the prescription to the current crisis. While the ECB and the Fed have recently been quick on the draw to inject liquidity in the markets, the Bank of England, although conceding that pumping cash will prop the system in the short-run, warned that such an approach would "encourage excessive risk-taking and will sow the seed for a future financial crisis."

Moody's predicts that defaults among speculative grade corporate issuers will rise over the next two years due to increased funding costs and difficulty in accessing debt capital. Issuer-weighted global speculative grade default rate is projected to reach 4.1% a year from now, and 5.1% by Aug 2009. Hardest hit will be the US market.

Except for Australia, the Asian credit benchmarks chalked modest improvements with the iTraxx Asia ex Japan 1.25bp tighter.

credit update 12 09 07

Credit ratings agencies were convened in Washington to explain how they rate structured financial products based on mortgage assets.

The uncertainty of rolling over more than $100 billion of commercial paper debt hangs over the money markets like Damocles’ sword, more acutely in the markets for asset-backed commercial paper ABCP. The notion that some of these ABCP were unsound sent investors to demand their money back and to refuse to keep rolling over the loans.

Another undercurrent of the subprime ructions is the burgeoning $907.4 bn credit card debt. The turmoil in the housing market has blunted home equity loans, forcing already debt-laden consumers to turn to credit card for financing. With the hefty interest rates on credit cards, up to 13.46%, those with poorer credit who are struggling to pay mortgages could default. Earlier, Moody's reported that American credit card companies' bad debts jumped 30% year-on-year. Observers worry that these credit card debts have been repackaged and sold off to the capital markets much like the subprime mortgages were. markets edged up yesterday with the Nikkei up 0.71%, All Ords up 0.63%, Straits Times up 1.53%. Hong Kong and Chinese shares paced decline as inflation surged and trade surplus widened, fuelling fears that borrowing costs will rise as the central bank tightens liquidity. Meanwhile, Japanese shares surged as machinery orders in July surged at three times the pace forecasted by economists. Australia's lowest unemployment rate plus the central bank's keeping the interest rate unchanged boosted the equities market.

US Treasury Secretary Paulson warned that crisis of confidence in the credit market is likely to last longer than previous financial shocks of the past two decades due to the complexity and the distribution of the securities. He adds that the next two years would be uncertain as many of the subprime loans reset to higher rates. He reiterates his resistance to proposals that would allow Fannie Mae and Freddie Mac, the giant government-chartered mortgage financing companies, to buy and hold billions of dollars in additional mortgages in their own investment portfolios.

Meanwhile, ECB President Trichet, called for authorities to scrutinize unregulated entities, whose activities he believes to have a major contribution to the subprime fallout. He also said that said there is still the risk of inflation accelarating and central banks may have to raise interest rates once the financial market turbulence abates. Earlier, the ECB postponed rate increase due to market volatility.

Asian credit benchmarks remained stable, with a slight widening of the iTraxx Asia ex Japan by 1.65 bps.

Confident that the Fed will cut rates soon, US stocks rallied with the S&P 500 up 1.36% and the Dow Jones Industrial up 1.38% led by technology and energy shares.

credit update 11 09 07

Except for the modest gains in Hang Seng, most major Asian stock markets closed in the red yesterday with the Nikkei down 2.22%, All Ords down 1.38% and Straits Times down 1.35. Japanese exporters and financials paced decline amidst the strengthening yen and slowing domestic demand reinforcing speculations that the Bank of Japan will keep interest rates unchanged this year as it monitors the impact of the US housing recession to Japan's economy.

The coming days are "pivotal" for the commercial paper markets as corporations would need to refinance almost $140 billion of commercial paper in Europe end of next week, of which

$60 billion is owed by conduits, firms set up to invest in longer-term assets, and the remaining is unsecured. The market for these conduits took a beating from the recent market convulsions as lenders refuse to provide credit.

Beleaguered Bear Stearns gets a boost as billionaire Joseph Lewis snapped up $860.4 million worth of the investment bank's declining stock to become one of its largest shareholders in less than a month.

Two Fed officials said that the current turmoil had begun to spill over to the broader economy, making it more and more probable that the Fed will lower the benchmark rate in their policy meeting next week. For investors, however, this is not anymore a question of whether or not the Fed will lower the interest rate but of how much lower.

The Asia credit indicators saw a general widening yesterday with the Japanese benchmarks edging up by 2 bps.

The US stock markets tumbled for the second day from the pronouncements of Fed officials that the housing slump has weakened the outlook for the over-all economy. The S&P 500 dipped 0.1% led by losses from Countrywide Financials and Home Depot. The CBoE volatility index rose 4%.

credit update 10 09 07

The Asian stock markets were mixed last Friday with the Nikkei still languishing in the negative territory to close 0.83% down while the All Ords and Straits Times were up 0.50% and 0.66%, respectively. The weakness in the Nikkei was attributed on reports pointing to a setback in economic growth. Aussie stocks charted gains with strong second quarter GDP and employment data alongside RBA's unchanged benchmark rate.

According Mortgage Bankers Association's quarterly delinquency survey, the number of US homes being foreclosed in the second quarter hit its highest in 55 years. Most of those entering foreclosure are adjustable-rate mortgages with the delinquency rate for the fixed remaining stable. The clear divergence between the fixed-rate mortgages stems from the impact of reset, with the ARMs not re-setting at higher, often unaffordable, rates. With the credit availability being constrained, refinancing options are limited. Observers say that the peak in foreclosures and delinquencies has yet to be reached in two to four quarters.

The depressed origination volume from the subprime turbulence takes its toll on the mortgage companies with Countrywide Financial Corp, the biggest US mortagage company, planning to cut its workforce by up to 12,000 or 20% of its workforce, the largest so far since the contraction of the US mortgage industry. In addition, IndyMac Bancorp said it will shed 1,000 jobs, or 10 percent of its work force and will halve its quarterly dividend citing the slowdown in mortgage lending.

The flurry of bleak news sent the US stocks tumbling down with the S&P 500 Index down 1.7% and the Dow Jones Industrial down 1.9% while the CBoE volatility index shot up 9.34%. The markets were surprised by the US Labor Department's report that payrolls dropped 4,000 in August, the first time in four years, rather than the expected increase of 110,000. General Motors, Alcoa, Bear Stearns and the home builder companies paced decline. Although there is quite a divergence of views in the Federal Open Market Committee, the Friday's weak US job report makes interest rate cut more imminent with the markets speculating between 25 or 50 bps.

Gyrations in the market along with the weakening dollar to its 15-year low have prompted Asian central banks to cut their reserves of US government debt. China cut its US debt by 3.4% in the second quarter, its first reduction in three years. Taiwan trimmed by 10% in the past year while South Korea decreased holdings 25% this year. Holdings of US bonds by governments and central banks at the Federal Reserrve fell 3.8%, the steepest decline since 1992.

To reduce its widening trade and capital surpluses from its hefty exports, China said it will fund outbound investment and increase foreign-exchange outflows.

The Asian credit benchmarks remained stable with a slight general tightening, the iTraxx Asia ex Japan edging down 1 bp.

credit update_09 09 07

The Asian stock markets continued mixed yesterday with the Nikkei up 0.61%, Hang Seng down 0.08%, All Ords down 0.14% and Straits Times up 0.61%.

The US Fed said that commercial paper market shrank 13.4% in four weeks, as investors shied away from debt backed by subprime mortgages. Short-term debt with less than 270 days maturity fell $54.1 billion in a week while asset- backed commercial paper declined $31.3 billion. The market for commercial mortgage backed securities (CMBS) has dried up in recent weeks with banks unable to shift loans off balance sheets in the form of new “securitised” bonds, hitting hard mortgage lenders and financial companies.

Companies roiled by the subprime convulsions tighten their belts with the Lehman Brothers announcing a further cut of 850 more jobs mostly in its Alt-A unit, after shutting down its subprime mortgage business last month. National City Corp., Ohio's largest bank, severs 800 jobs and takes a $200 million hit in its mortgage business. Meanwhile, Countrywide Financial Corp, the largest mortgage lender in the US, said it will shed another 900 jobs on top of the 500 positions cut last month.

The European Central Bank injected €42.2bn ($57.6bn) into money markets bringing the overnight euro LIBOR down to 4.13125 and expressed readiness to intervene in the three-month money market where the rates have recently shot up. However, ECB left its main interest rate pegged at 4%. Meanwhile, the US Federal Reserve pumped $31.25bn into overnight markets, its biggest intervention in almost a month.

In an effort to stem the erosion of demand for asset-backed securities and to add liquidity in the financial system, the Reserve Bank of Australia pledged to buy debt backed by mortgage payments. The announcement pulled the three-month interbank lending rate down 15 bps, from its 11-year high the day before.

Even as the other economies are battling with threats of recession, China is hitting the breaks on its overheating economy by raising the reserve requirement for banks to 12.5%, the highest in almost 10 years. The policy is aimed at curbing inflation fuelled by cash from trade surpluses which has accelerated to a 10-year high.

The US stock markets edged higher with S&P 500 up 0.43% and Dow Jones Industrial up 0.44%. The CBoE Volatility Index fell 2.4%.