Global equity markets remained depressed last week amid a succession of downbeat corporate news, and weak economic data. Earlier in the week, investors had grown hopeful that the worst might be over for firms saddled with soared mortgage-related bets following positive developments in the monoline industry. However, that optimism quickly evaporated following a string of negative headlines as the week progressed. AIG’s fourth quarter results coupled with UBS estimates that losses from the global credit crisis will top USD 600 bn reawakened investor’s financial fears, after the insurance major reported a USD 5.29 bn loss, the deepest in its history, and took a USD 11.2 bn write down related to the estimated market value of credit derivatives. The Dow ended down 2.42% over the week, while the FTSE slipped 1.92%.
Shaken by the credit market malaise, Government sponsored mortgage lenders, Fannie Mae and Freddie Mac, recorded massive fourth quarter losses of USD 3.56 bn and USD 2.45 bn each amid a sharp rise in delinquencies. With Standard Chartered having abandoned a plan to bail out Whistlejacket Capital, the SIV booked losses of USD 300 mn and became the first bank-sponsored SIV to default. In an odd silver lining, the monoline industry got a temporary breather last week as Moody’s became the second ratings agency to reaffirm MBIA’s AAA rating after S&P on Monday. Both rating agencies have moved MBIA to negative outlook from ‘on review from downgrade’, thereby reducing the possibility of imminent ratings cut.
The embattled municipal bond market received a major setback last Friday after hedge funds were forced to unwind complicated bets and in the process dump billions of dollars of the securities. The hedge funds fire sales sent yields on debt from munis to historic high levels, with the average AAA-rated, 30-year muni bond yielding 5.14% on Friday as compared to 4.42% on a U.S. Treasury 30-year bond. The future looks gloomy for the munis with two short-term municipal markets, for auction rate and variable demand note obligations, having frozen in recent weeks because investors are apprehensive about the credit worthiness of bond insurers as a result of their bad bets on subprime mortgage investments.
Short term money markets beginning to feel the pressure:
The Federal Reserve's sixth auction through its Term Auction Facility (TAF) lent USD 30 bn of 28-day credits at 3.080 pct, above the 3.0 pct Fed funds target rate and well below the 3.5 pct discount window rate. The auction reflected increased demand for funds with the number of bidders (72 from 66), and the spread between the stop-out rate and the minimum bid rate (27bp from 15bp) going up.
The 3M USD LIBOR dipped marginally to 3.0575% while the 6M USD LIBOR edged down 1.25 bps over the previous week to close 2.93%. The total weekly borrowing from the discount window fell to USD 0.845 bn from USD 1.1 bn previously.
The 3M USD LIBOR dipped marginally to 3.0575% while the 6M USD LIBOR edged down 1.25 bps over the previous week to close 2.93%. The total weekly borrowing from the discount window fell to USD 0.845 bn from USD 1.1 bn previously.
The Asset backed commercial paper (ABCP) market showed some improvement after deteriorating for 4 consecutive weeks after its outstanding value rose by 7.6 bn as compared to a USD 11.6 bn dip in the previous week
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