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.