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.