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.