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.