Global financial conditions monitor - Week ending February 1, 2008

Citing ‘stressed financial market conditions’ and a ‘deepening of the housing market contraction’, last week, the Fed delivered another shot in the arm of the ailing US economy by slashing the Fed funds and discount rate by 50 bps, bringing them down to 3.0% and 3.5% respectively. Global investors welcomed the half point cut with the Dow going up almost 201 points . However the euphoria was short lived as investors sold stocks on concerns of a troubled bond insurance industry with the Dow closing the day 37.4 points down. While being bearish on the broadbased weakness in the US economy, hopes that a big merger between Microsoft and Yahoo may revive the later meant that global equities ended the week on a mixed note.

Monoline insurers continued to create havoc as further downgrades and write downs added fuel to the jittery credit market conditions. While Financial Guaranty Insurance Co became the third major insurer whose AAA rating was axed by Fitch, MBIA posted its second consecutive net loss of USD 2.3 bn as write-downs in its credit derivatives portfolio rose to USD 3.5 bn. The credit market, which is already shell shocked by write downs of about USD 100 bn at big financial firms and declines in housing values, received another blow with S&P threatening to downgrade more than 8000 mortgage investments, the largest during the past few months. While the fate of these insurers remains crucial in the unfolding financial turmoil, losses on subprime securities continued to eat into the profits of major banks across the globe. European major, UBS AG, was the biggest casualty last week as it posted a net loss of USD 11.4 bn thanks to USD 14 bn writedowns on subprime infected assets

The odd silver lining continues to be the comfortable liquidity conditions in the short tem money markets as the 6M USD LIBOR eased below 3.25%. Fiscal proposals to jumpstart the US economy got a major boost last week with the House approving the stimulus plan. While it now awaits the senates nod, it remains to be seen how well the double barreled stimulus (fiscal + monetary) helps stave off a much dreaded recession in the US economy.