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%.