Euribor gone mad

That is the splashy news on the website of an Italian newspaper. The Euribor spiked violently by 60 basis points to 4.87pc today, its sharpest move higher ever, to close at 4.82pc for one month and 4.81pc for three month. The rate is now higher than at the climax of the credit crises in August. The commercial paper rates are also re approaching the worst levels of the summer. Pleas are growing that the EZB will cut rates on its next meeting in December.

Thomas Mayer, Europe economist for Deutsche Bank, said the authorities should take pre-emptive action to unfreeze the debt markets and reduce the danger that events could spiral out of control. "If they don't do anything, this could go beyond just a normal recession. With this credit crisis it could turn into a very uncomfortable situation, with a real economy-wide crunch that we cannot stop," he said. "We're still seeing considerable stress in the European banking system, especially for smaller banks that can't get credit. I am afraid we could have another Northern Rock case," he said. It emerged today that Germany's IKB bank had racked up losses of €6.15bn on subprime ventures, although it has been rescued by a pool of German banks.
Veronique Riches-Flores, Europe economist at Société Générale, said investors were deluding themselve if they believed that Europe and the rest of the world could carry on growing briskly as the housing slump engulfed America. "The idea people have in mind that emerging markets can decouple is completely wrong. Emerging markets are only OK as long as the US consumer is OK," she said. Joachim Fels, head of economic research at Morgan Stanley, said it was an error to dwell on inflation at time when the economy is tipping over, dismissing the latest spike as a hangover effect that would subside next year. The greater risk is monetary overkill. The surge in Euribor spreads amounts to three rate rises, he said.

Banks in Europe are obviously reluctant to lend to each other. One can only speculate about the exact reasons. Back in August the first signs that the credit problems in the US were spilling over to Europe could be seen in the currency markets. The euro was depriciating against the dollar and the yen. On August 10 the European Central Bank loaned 61.05 billion euros ($83.6 billion), pumping funds into the banking system for a second day after U.S. subprime mortgage losses rippled through credit markets and drove interest rates higher. BNP Paribas announced that it is freezing redemptions in three asset backed securities funds due to inability to fairly value their holdings. The seizure of the credit markets ironically enough benefited the US dollar, the epicenter of the sub-prime mess, as the greenback would become bid on safe haven flows.
Could the freeze up in interbank European markets be behind the sudden reversal of the faith of the dollar rather than the pick up of economic growth in the future, as suggested by some dollar centric pundits today? It strikes me as rather odd that the dollar would appreciate on a day when FED chief Bernanke makes it certain that further rate cuts are coming.

British Blogger Macro Man in his recent post "Double Whammy" had an interesting take on the dollar today, citing the cover of magazines as good contrarian indicators.

Bail Out!

Federal Reserve Chairman Ben Bernanke said on Thursday a resurgence in financial strains in recent weeks had dimmed the outlook for the U.S. economy, signaling an openness to lowering interest rates again. Bernanke joined Vice Chairman Donald Kohn in acknowledging the threat to spending from reduced access to credit, a shift from their October assessment that growth and inflation risks were balanced.

U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers, according to people familiar with a meeting he led yesterday. Three months after regulators asked banks to modify loans for borrowers at risk of default, agencies have little comprehensive data on what lenders and loan servicers have done. The FDIC estimates that 1.54 million nonprime mortgages valued at $331 billion will reset by the end of next year. Credit protection costs fell sharply on housing- and mortgage-related companies on Friday after the report.

Freddie Mac said it priced a $6 billion share sale and saw strong demand for the offering. The mortgage giant is selling 240 million new shares of preferred stock to bolster its capital levels after reporting a larger-than-expected $2 billion subprime-related loss last week.

Citigroup and Wells Fargo led U.S. bank shares higher in Europe after Credit Suisse Group upgraded the industry on valuations, growth prospects and lower interest rates. Goldman removed Apple from its ``Americas conviction buy'' list. The improvement in the company's performance ``is smaller and more gradual than we had been expecting,'' analysts wrote in a note to clients.

The European Central Bank took additional steps to calm money markets after the cost of borrowing in euros for a month rose to a six-year high. The ECB will extend the maturity of its regular refinancing operation settling on Dec. 19 to two weeks from one. The cost of borrowing in euros for a month rose by a record yesterday as banks sought funds to cover their commitments through to the start of 2008. The London interbank offered rate that banks charge each other for euro loans due after the end of the year jumped 64 basis points to 4.81 percent, the highest since May 2001. "There is lots of insecurity,'' said Michael Schubert, an economist at Commerzbank AG in Frankfurt. "Banks are keeping liquidity just in case there's a shortage.''

Royal Bank of Canada, the country's biggest bank, said fourth-quarter profit rose 4.9 percent, the smallest increase in two years, as consumer-banking revenue countered writedowns on asset-backed debt. Royal Bank is one of five Canadian lenders that announced combined writedowns of about C$1.9 billion. Canadian banks may post their first average profit decline in five years this quarter because of the writedowns and higher loan-loss provisions. Royal Bank took a pretax writedown of C$357 million on U.S. subprime mortgage-backed securities and collateralized debt obligations.

Royal Bank of Scotland, the U.K.'s second-biggest bank, may write down as much as 1.9 billion pounds ($4 billion) on credit-related securities and leveraged loans, Sanford C. Bernstein & Co. estimated. "We are really in the first stages of the unwind of all the structured credit that has been built up over the last seven years'' in banks, analysts said.

Northern Rock, the U.K. bank bailed out by the Bank of England in September, declined as much as 11 percent in London trading today after Sky News said investor J.C. Flowers may withdraw its offer to buy the bank.

Morgan Stanley said that Zoe Cruz, a 25-year veteran at the firm, was ousted as co-president Thursday in a sweeping management shake-up aimed at turning around the investment bank amid turmoil in the credit markets.

Fortis, part of the group that bought ABN Amro in Europe's biggest-ever banking takeover, is raising 2.5 billion euros ($3.7 billion) by selling bonds convertible into shares to help pay for the purchase. The Fortis bonds will pay annual interest of 175 basis points to 250 basis points more than the euro interbank offered rate, or Euribor. "Given the issues Fortis has regarding disclosure of its exposure to subprime and the like, the fear was that they would have to pay even more'' to borrow, said an analyst.

Tiffany & Co., the world's second- largest luxury-jewelry retailer, said quarterly profit increased more than analysts estimated and raised its earnings forecast for the year as tourist spending boosted revenue.

Japan's economy showed its first signs of inflation this year after gasoline prices surged. Core consumer prices, which exclude fresh food, climbed 0.1 percent in October from a year earlier, the first increase since December 2006.

European inflation accelerated in November to the fastest in more than six years, adding pressure on the European Central Bank to raise interest rates even as economic expansion cools. The inflation rate in the 13-nation euro area rose to 3 percent this month from 2.6 percent in October.

The overnight Libor fixing today jumped to 5.95 pct from 5.83 pct yesterday, whereas the three-month contract rose to 6.61 pct from 6.60 pct yesterday and 6.55 pct on Monday. Both have been moving away from the Bank of England's 5.75 pct official Bank rate.

Oil prices fell Friday on expectations that OPEC will increase output next week and on fading concerns of a supply disruption from a U.S. pipeline fire. Light, sweet crude for January delivery fell $1.55 to $89.46 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe.

The yen fell broadly on Friday and high-yielders gained after comments by Federal Reserve Chairman Ben Bernanke cemented expectations of easier monetary policy, which may help the U.S. economy to avoid a recession. The euro was up 0.2 percent versus the dollar at $1.4768, The dollar index was steady at 75.556, holding above a record low hit last week. The dollar rallied on Friday morning in New York and was on track for its biggest weekly gain in more than a year as investors bet that more U.S. interest rate cuts would prevent a recession. The dollar index rose 0.5 percent to 76.019.

European stocks set two week highs on Friday and Wall Street looked set for a firmer open as equity markets basked in the glow of an expected cut in U.S. interest rates while the low yielding yen slipped back. The pan-European FTSEurofirst 300 index was up 0.9 percent at 1,522.42 points, after rising to 1,523.7, its highest in two weeks with financial stocks the top gainers. Earlier in Asia, Tokyo's Nikkei average touched a three-week high and closed 166 points or 1.08 percent higher. In Hong Kong Hang Seng closed at 28,643.61 up 161.07 points or 0.57%. On the mainland Shanghai Composite closed lower at 4,871.778 down 131.555 points or 2.63%. The B shares were bucking the trend and were up 330.79 higher by 3.70 percent. In Europe the markets were higher with the CAC40 up 1.47%, the DAX up 1.45% and the FTSE 100 up 1.36% at late afternoon trading.

Third Quarter GDP revised higher!

A surge in inventory-building and robust exports propelled U.S. economic growth ahead at the fastest rate in four years during the third quarter. Gross domestic product climbed at a revised 4.9 percent annual rate instead of 3.9 percent reported a month ago. Companies built up inventories twice as fast during the third quarter as the government had estimated a month ago - at a $32.9-billion annual rate instead of $15.7 billion. This good economic news contrasts with weekly jobless claims which were up 23k to 352k, higher than expected.

Holiday spending at U.S. retailers climbed 6.5 percent to $20 billion over the Thanksgiving weekend as consumers sought half-off sales and early store openings. Sales on the Sunday following Thanksgiving climbed 4.2 percent to $3.6 billion. Black Friday, the day after Thanksgiving, recorded an 8.3 percent increase to $10.3 billion. sales on retailers' Web sites rose 21 percent to $733 million on Nov. 26.

Sears Holdings Corp., the largest U.S. department-store company by sales, reported quarterly profit that fell more than analysts estimated on lower revenue. The stock declined 9.7 percent in New York.

China Investment Corp., the nation's $200 billion sovereign wealth fund, signaled it may invest in stocks rocked by subprime mortgage defaults, and `" wants to be a stabilizing force in the international capital markets." "The steady stream of sovereign wealth funds buying distressed assets tells us there is a buyer of last resort out there,'' said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., the fourth-largest Australian bank. He said that will encourage investors to buy higher-yielding assets."

ETrade Financial, which is ensnared in the mortgage crisis, said it is getting a $2.55 billion cash infusion from Citadel Investment Group, in a bid to restore confidence and liquidity in the discount brokerage. Chief Executive Officer Mitchell Caplan is stepping down.

Ping An Insurance Group bought a 4.2 percent stake in Fortis, Belgium's biggest financial-services company, for 1.81 billion euros ($2.7 billion) in the largest overseas acquisition by a Chinese insurer.

National Australia Bank Ltd., the nation's largest, agreed to buy U.S.-based Great Western Bancorporation for $798 million. The Omaha-based bank has assets of more than $3.4 billion and about 100 branches in the Midwest agricultural region.

Morgan Stanley is borrowing 225 billion yen ($2 billion) from Citigroup, Shinsei Bank and the Government of Singapore Investment Corp. to fund Japan's largest real estate deal, three people familiar with the transaction said. Citigroup and Shinsei are looking for buyers of the senior loans worth 180 billion yen. "Debt investors have become more demanding in pricing as well.''

Fears are growing that UK bank Alliance & Leicester will resort to a fire sale of assets to shore up its funding position as the credit crisis escalates. One banker said: "All small institutions will have a funding issue. If you haven't got deep pockets it's a very bleak landscape at the moment." The stock jumped 12 percent on Thursday, after saying in a surprise trading update that it had lined up financing for its maturing medium-term funding into the third quarter of 2008.

Companies in Britain and Europe have failed to place a single high-yield bond since the credit crunch kicked off in August. The European Central Bank's October survey of 90 eurozone banks found that lenders had tightened conditions dramatically, both raising interest rates and slashing the maturity of loans. Investment grade bonds in Europe are still finding buyers but the volume has plummeted by half this month to €6.3bn. The closely-watched iTraxx Crossover index measuring spreads on low to mid-grade corporate debt rose above 400 last week for the time since the Summer, but settled at 374 yesterday. The US junk bond market has also ground to a halt after holding up better than Europe in September and early October.

Investors in Europe have suddenly become wary of Italian, Greek, Spanish, and Belgian sovereign bonds, driving spreads over German government bonds to the highest level in six years. The spreads rose to 37 basis points (bp) for Greece, 18bp for Spain, and 14bp for France and 40 for Italy. The spike in Club Med spreads had been offest by a falling bond yields overall, so these countries do not have to pay more to cover their deficits. "The nightmare for Italy is if you get higher spreads and higher yields at the same time,"

European bonds rallied after the Bank of England said it will offer emergency funds with longer repayment terms to stem rising money-market rates, rekindling concern about credit markets and demand for government debt. The safe-haven bid will remain a feature of the fixed- income landscape over the short term.
European Central Bank council member Klaus Liebscher said, "The jump in the October inflation rate to 2.6 percent from 2 percent in September is alarming.'' Germany's Bundesbank, by contrast, said there's a risk economic growth in Europe's biggest economy will slow next year, after oil rose to a record and the U.S. housing slump rattled financial markets.

KfW Group, which organized the bailout of IKB Deutsche Industriebank over subprime losses, said an agreement was reached with German banking associations to cover the lender's remaining risks of about $520 million.

The worldwide slump in credit markets is likely to last for at least another year, triggering a reduction in leveraged buyouts, according to a survey of banks, private-equity managers and hedge funds in Europe. LBOs have fallen to $157 billion so far in the second half of this year, from a record $579 billion in the first half, according to data compiled by Bloomberg.

Bear Stearns will cut 650 jobs, or 4 percent of its global work force, as the investment bank braces to lose money in the fourth quarter due to bad bets on subprime mortgages.

Japan's industrial production rose to a record in October. Production climbed a seasonally adjusted 1.6 percent from a month earlier, when it fell 1.4 percent. Export growth doubled to 13.9 percent in October from a year earlier, as Chinese and Europeans bought more fuel- efficient cars.

European retail sales fell this month by the most since May 2004 after increasing gasoline prices and interest rates hurt consumer spending. A gauge measuring retail sales declined in November for a second month to a seasonally adjusted 45.9 from 48 in October. At teh same time German unemployment fell to 12-year low.

One-month Libor soars as banks seek year-end funding. The London interbank offered rate that banks charge each other for euro loans that only come due after the end of 2007 climbed 64 basis points to 4.81 percent, the British Bankers' Association said. The rate charged for dollars jumped 40 basis points to 5.23 percent. The cost of borrowing dollars for three months rose for the 12th day, climbing 4 basis points to 5.12 percent. The three- month rate for euros increased 3 basis points to 4.78 percent. "The increases we've seen in borrowing costs cannot be simply explained away by year-end pressures; this is a full-on credit crisis,'' said Stuart Thomson, who helps oversee $46 billion in bonds at Resolution Investment in Glasgow, Scotland. ``There's no end in sight either. It's a really unpleasant picture.''

For the most part markets followed WallStreet higher. The Nikkei gained 360 points or 2.4 percent. In Hong Kong the Hang Seng index bounced back and closed 4 percent higher. The Shanghai composite was 200 points higher to close at 5,003 points. The Shanghai Composite Index has fallen 16 percent in November, the most since February 1995. The decline in China compares with a 21 percent decrease in Japan's Topix index from its February record to Nov. 22, the first of the world's 10 biggest stock markets to enter a bear market since the summer's U.S. subprime-mortgage collapse.
European equities traded flat by midday on Thursday, paring earlier gains as renewed worries on banks dampened enthusiasm for global equities triggered by speculation of a cut in U.S. interest rates. By 1150 GMT, the FTSEurofirst 300 index of leading European shares was steady at 1,501.9 points after earlier rising as much as 0.8 percent. The index jumped 2.7 percent on Wednesday when the U.S. Federal Reserve's second-in-command signalled a readiness to cut rates again. The FTSEurofirst has crawled back into positive territory for the year and is up 1.2 percent in 2007. Across Europe, Britain's FTSE 100 index was flat, Germany's DAX rose 0.5 percent and France's CAC 40 edged up 0.3 percent.

FDIC quarterly banking survey

The organization that oversees all registered financial institutions in the US came out with it's quarterly report. Third-quarter profits at federally insured banks and thrifts plunged to a four-year low as large institutions set aside billions to cover losses from bad mortgages. The Federal Deposit Insurance Corporation (FDIC) said Profits at the 8,560 FDIC-insured institutions dropped $9.4 billion, or 24.7 percent, to $28.7 billion, hampered by soaring loan defaults and provisions for loan losses. As if the problems in the residential mortgage market would not be enough, we can now add the commercial real estate market on top of it.

"Industry performance was hurt by asset-quality problems and volatility in financial markets during the third quarter. Almost half of all insured institutions reported year-over-year declines in earnings. Residential mortgage loans were the focal point of asset-quality problems. But delinquency and loss rates were up across all major loan categories," said FDIC Chairman Sheila Bair. "Because insured financial institutions entered this period of uncertainty with strong earnings and capital, they are in a better position both to absorb the current stresses and to provide much needed credit as other sources withdraw. Going forward, the outlook for the industry depends on the severity of the housing downturn and the extent to which it spills over into the broader economy."

Chairman Bair also noted that even as banks attempt to address weaknesses in their residential mortgage portfolios, the non-current rate of real estate construction loans increased sharply from its historic lows.

Asset-quality indicators continued to deteriorate. The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) grew for a sixth consecutive quarter, rising by $16.0 billion (23.8 percent). Loans secured by residential real estate accounted for more than half of the growth. Noncurrent residential mortgage loans increased by $7.5 billion (27.2 percent), and noncurrent home equity lines of credit rose by $783 million (27.4 percent). Noncurrent real estate construction and development loans rose by $3.6 billion (45.5 percent). At the end of September, the amount of loans and leases that were noncurrent totaled $83 billion, the highest level since the third quarter of 1992.

FED to the Rescue!

Fed speak is featuring prominently this week with the chief and his foot soldiers out and about reassuring investors that they will not let them down. Yesterday Federal Reserve Bank of Philadelphia President and CEO Charles Plosser said that because weaker economic growth is already expected in early 2008 and was considered when the Fed cut interest rates in October, he is not inclined to seek another cut unless growth is much weaker than expected. He also predicted that residential investment will turn 'positive' in the last two quarters of 2008, and said the housing market should turn around by then as well. he said. Plosser strongly suggested that he is not in favor of an additional rate cut at the next policy meeting on Dec. 11"I expect that overall real GDP will grow faster in the second half of 2008 as it returns to its longer-run trend of about 2.75 pct,", "It is important to recognize that the Fed cannot resolve this price discovery problem. The markets will have to figure this out."

The odds of further interest rate cuts increased this morning, after Federal Reserve Vice Chairman Donald Kohn said elevated turbulence in the financial markets could tighten financial conditions for households and businesses. December fed funds futures rose 0.005 points to 95.705, which implies a 64% chance that the Fed will lower its target on overnight rates by 50 basis points to 4% after its policy setting meeting on Dec. 11. Late Tuesday, the odds of a 50 basis point cut were 62%.

In Europe central bankers are admitting that they are in between a rock and a hard place when it comes to their monetary policy. Contrary to the FED they are focused on their primary mandate to keep inflation low by watching headline inflation and not diverting attention to the ridiculous core inflation. Inflation data published in Germany yesterday show that energy and food prices pushed prices this month to the highest level since at least 1995, leading economists to forecast the annual eurozone figure, released today, would reach 3 per cent or above for the first time in more than six years. That would pose a serious challenge to the ECB, which pledges to keep inflation “below but close” to 2 per cent. It remains to be seen if the European Central Bank can resist an easing cycle that has began on the other side of the Atlantic.

European Central Bank President Jean-Claude Trichet and other European authorities are in China this week for the Sino-European conference. They are trying to go where US treasury secretary Paulson failed so far. Trichet said China may allow the yuan to rise more against the euro even as Chinese officials signaled faster gains are unlikely. Premier Wen Jiabao reiterated China will pursue "gradualism'' in making the exchange rate more flexible and rejected Europe's argument that a quicker appreciation would help narrow the region's growing trade gap. The unprecedented visit to China of Trichet and Luxembourg Prime Minister Jean-Claude Juncker may have ended in disappointment as traders sold the yuan for the first time in four days on the bet that China will resist Europe's lobbying.

We can not forget about the financials even at a day like today when everybody seems to be upbeat and buying everything that has been sold for the last couple of weeks. After the closing bell yesterday, shares of Wells Fargo dropped more than 2 percent to $29.19 after the fifth-largest U.S. bank said it would take a $1.4 billion charge in the fourth-quarter due to mortgage losses. The charge shows how the housing downturn affects even lenders with relatively prudent underwriting standards, since the company never made many of the exotic mortgages that led to soaring defaults among borrowers.

The question comes to mind if Wells is taking such a big writeoff who else will be impacted. A source that has been swept under the rug are big investment pools like government pension funds. Florida local governments and school districts pulled $8 billion out of a state-run investment pool, or 30 percent of its assets, after learning that the money- market fund contained more than $700 million of defaulted debt. Almost 6 percent, or $2.4 billion, of the fund's short-term investments consist of asset-backed commercial paper that has defaulted. Those holdings include $425 million in Axon Financial, a structured investment vehicle, or SIV.

In the real world financial players are scrambling to stop the leaking of their portfolio assets, as Chicago's Santelli would say "the leaking of their SIVs." Shares of Freddie Mac fell in after-hours trading yesterday, after the No. 2 U.S. home financing provider said it would slash its dividend by 50 percent and would raise $6 billion through the sale of preferred stock. Yesterday Citigroup announced it is receiving a $7.5 billion capital infusion from the investment arm of the Abu Dhabi government. CIBC World Markets financial services analyst Meredith Whitney, whose vociferous comments on Citigroup prompted chairman and chief executive Chuck Prince to resign earlier this month, said the new investment was “not enough, and certainly too late”. “They’re desperate,” said Ms Whitney. “This $7.5bn is just not enough money by a long shot.” She believes that the odds that the bank, the world’s largest by assets, will still cut its dividend are “100pc”, while adding that the company may be forced to sell more than $100bn of higher quality assets at a discount in order to raise cash. Australian hedge fund Absolute Capital has been put into administration, the latest domestic victim of a credit squeeze that shows no signs of easing. Half the fund is made up of about 46 per cent complex sub-investment grade collateralised loan obligations, and 4 per cent collateralised debt obligations. In Europe the situation is not much better. State run bank KfW doubled it's loan loss provisions to 4.8 million euro after higher than projected losses in the failed lender IKB bank.

To make things worse Standard & Poor's said it may cut its credit ratings on six collateralized debt obligations in Europe because of losses on securities backed by U.S. subprime mortgages. S&P placed the ratings of 17 portions of CDOs on CreditWatch with negative implications, which applies to less than 1 percent of CDOs rated in Europe.

Another cloud that is gathering on the horizon is the commercial real estate market in the US. The cost of derivatives protecting investors from defaults on the highest-rated bonds backed by commercial properties more than doubled in the past month. Sales of debt secured by commercial mortgages tumbled 80 percent to $3.9 billion in October from a year earlier. The seven-year rally in offices and retail properties ended in September when prices fell an average of 1.2 percent. More losses are likely because banks are holding $54 billion of commercial mortgages they can't sell, although mortgage brokers say traders are overreacting. Defaults are running at 0.4 percent in the U.S., below the average of about 1 percent over the past 10 years.

Amongst all this trouble ironically the consumer is holding up. Online shopping reached a record this week. ComScore said sales on retailers' Web sites rose 21 percent to $733 million on Nov.26, the first Monday after Thanksgiving. The average customer purchase dropped 12 percent because new buyers tended to spend less online. Sales on so-called Cyber Monday a year earlier climbed 26 percent. Retail sales ex auto ex gas and Wal-Mart same store sales show a declining trend of consumer purchases.



Japan's retail sales rose at the fastest pace in more than a year as consumers bought new-model cars and record gas prices increased revenue at filling stations. Sales climbed 0.8 percent in October from a year earlier, a third monthly gain. Fuel sales advanced 2.3 percent from a year earlier, the most in 11 months. Motor vehicle sales surged 2.5 percent, the fastest pace since March 2006. This data comes on the tails of the Japanese Cabinet Office’s monthly economic report, which cut its assessment of the labor market for the first time in three years. With the bank of Japan unlikely to tighten rates anytime soon investors borrowed the yen to jump start the carry trade. The dollar rose as much as 0.7 percent to $1.4724 per euro, its biggest gain since Nov. 12, and traded at $1.4732 as of 7:35 a.m. in New York. European stocks advanced for the first time this week and brokerages recommended buying shares in UBS and British Airways. Japanese stocks fell, led by Sumitomo Mitsui Financial, after Wells Fargo announced a $1.4 billion pretax charge tied to increased losses on home equity loans. The Nikkei slid 69.07, or 0.5 percent, to 15,153.78 at the close of trading in Tokyo. The Topix index slipped 3.14, or 0.2 percent, to 1,475.64. In Hong Kong the Hang Seng advanced 161points or 0.6 percent. The Shanghai Composite was down 1.1 percent. U.S. stock futures also rose, buoyed by a hint of further rate cuts in December.

Oil wealth to the rescue

Citigroup is receiving a $7.5 billion capital infusion from the investment arm of the Abu Dhabi government, intended to help rebuild it's capital levels. As a result of the deal, the investment authority known as ADIA will become one of Citigroup's largest shareholders, with a stake of no more than 4.9%. The stake will exceed that of Saudi Prince Alwaleed bin Talal, long known as one of Citigroup's largest shareholders. The investment underscores the growing role that Middle Eastern investors are taking outside their home turf. Separately yesterday, an investment company owned by Dubai's ruler, Sheikh Mohammed bin Rashid al-Maktoum, bought a stake in Sony. ADIA, which has almost $1 trillion under management, this summer bought a small stake in Apollo Management. Japanese stocks erased a morning fall of more than 2% after the Citigroup news was announced, on hopes that support for the company will ease fears about fallout from subprime problems.

The EZB and FED have again injected extra liquidity into the markets and pledged to keep overnight lending rates close to their targets. In the meantime banks are struggling to get funding for their off-balance sheet investment vehicles. National Australia Bank, the country's biggest, said last week it may have to hold short-term debt of Sydney-based Rams Home Loans Group on its own balance sheet if the mortgage company fails to secure refinancing. Yesterday HSBC became the first bank to bail out troubled SIVs by taking it on their balance sheet.

Barclays, UK's third-biggest bank, said writedowns in its securities unit will end four years of earnings growth. Barclays said its pretax profit in 2007 will be "broadly in line'' with analysts' average estimate of about 7.1 billion pounds, the same as 2006. Credit-default swaps on the London-based bank dropped 1.5 basis points to 61 today, down from a record 72 basis points on Nov. 22.

The Markit CDX North America Investment-Grade Index Series 9 fell 2.5 basis points to 82.75 basis points today. The Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies, dropped 1 basis point to 59 basis points today. Contracts on the Markit iTraxx Crossover Series 8 Index of 50 European companies with mostly high-risk, high-yield credit ratings was little changed at 382 basis points to 375.

Prices of existing U.S. single-family homes slumped 4.5 percent in the third quarter from a year earlier, matching a record decline from the previous period as the housing downturn deepened, according to a national home price index on Tuesday. The S&P/Case-Shiller National Home Price Index fell 1.7 percent since June, marking the largest quarterly decline in the index's 21-year history, S&P said in a statement. The composite month-over-month index of 20 metropolitan areas fell 0.9 percent to 195.62 in September from August, bringing the measure down 4.9 percent from a year earlier.

Rising foreclosures will lead to billions of dollars in lost economic activity next year in the nation's major metropolitan areas, according to a report compiled for the U.S. Conference of Mayors. The biggest losses in economic activity are projected for some of the nation's largest metropolitan areas. New York is expected to lose $10.4 billion in economic activity in 2008, followed by Los Angeles at $8.3 billion, Dallas and Washington at $4 billion each, and Chicago at $3.9 billion. The report estimates U.S. gross domestic product growth in 2008 will be 1.9 percent, coming in about $166 billion, or one percentage point, lower as a result of mortgage problems.

Surprisingly given all the bad news on the housing front some have a rather upbeat view of the future in the industry. Pulte Homes reaffirmed its Q4 guidance Monday despite poor demand and elevated supply levels for homes. A month ago, the homebuilder stood by its earlier forecast of income from continuing operations in the range of $0.10 per share to breakeven.

Global losses related to the U.S. subprime mortgage sector problems are significant but bearable, European Central Bank governing council member Christian Noyer said on Tuesday, as the dollar and stocks rallied on hopes that financial firms are recovering from its effects. Current estimates put the direct cost of subprime defaults at around $250 billion, Noyer told a forum in Tokyo at which Bank of Japan Governor Toshihiko Fukui said his central bank was still on guard against market turbulence.

Some monetary authorities are not as sanguine about the future inflation outlook. The BOE’s Chief Economist Charles Bean issued hawkish commentary, saying, “The backdrop to our attempts to keep inflation in line with target is less favorable than it has been. If the imported component of inflation is somewhat higher, the domestically generated component needs to be somewhat lower to compensate, and that may mean we have to run a tighter monetary policy for a while to get that domestic inflation down.”
Traders are betting that the FED will lower interest rates several times in the months ahead, and hope that other central banks will follow. Goldman Sachs said it expects the Federal Funds rate to bottom out at 3 percent in the next six to nine months, down from an earlier forecast of 4 percent. Goldman also said chances of a recession are pushing up to between 40 percent and 45 percent. German November preliminary inflation data point to the upside and German IFO business climate survey surprisingly rose in November to 104.2 from 103.9, putting an end to six consecutive months of declines, making it harder for the EZB to slash rates.

The US consumer was out shopping in droves over the Thanksgiving weekend mainly lured by bargain hunting. The average amount spent by shoppers actually decreased compared to last year. Nevertheless retailers are upbeat about tje outlook for the holiday season. The International Council of Shopping Centers-UBS Retail Chain Store Sales Index decreased by 0.1% in the week ended Nov. 24 from its level in the week before, on a seasonally adjusted, comparable-store basis. This result Tuesday followed a 0.8% increase in the prior week. On the year, chain store sales were up 2.5% in the week ended Nov. 24, compared with a rise of 2.2% in the prior week. Online retailers were set to break one-day records for traffic and sales, as consumers hunted down Cyber Monday bargains. By 2 p.m. ET, more than 300 retailing Web sites tracked by Internet monitoring firm Akamai were drawing 4.6 million visitors per minute, a three-year record for most traffic in a single day to retail Web sites. Cyber Monday sales are estiamted to surpass $700 million, which would make it the heaviest online spending day on record.

In other news Goldman Sachs on Tuesday downgraded the U.S. automobile sector to "cautious," in part due to growing concerns about the U.S. macro outlook and its implication for auto sales. The earning season is winding down. Staples, the world's largest office-supplies retailer, said quarterly profit fell for the first time in more than four years after North American consumers and small businesses bought fewer computers. Profit decline was less than analysts anticipated on increased international sales. The shares climbed 8.8 percent in early U.S. trading. American Eagle Outfitters, the U.S. retailer of clothing for 15- to 25-year-olds, said third- quarter profit fell as it increased discounts to clear out unsold merchandise. The company forecast fourth-quarter profit that trailed some analysts' estimates.

Crude oil fell for a second day on speculation OPEC will increase production as record prices threaten to stifle economic growth. Saudi Arabia is pumping 9 million barrels a day, October production averaged 8.75 million barrels a day. European stocks extended losses on Tuesday afternoon as oil shares tracked crude prices lower and banks trimmed gains made after Barclays reassured investors on its outlook. After rallying in early trade, the DJ Stoxx European bank index fell back in the red, down 0.2 percent, though Barclays was still up 2.6 percent. At 1311 GMT, the FTSEurofirst 300 index of top European shares was down 1.2 percent at 1,450.66 points, with techs and miners also prominent losers. In Asia stock markets ended mixed with the Nikkei gaining 0.5%, reversing morning losses after Citigroup news put confidence back into the banking sector. In Hong Kong the Hang Seng index lost 1.5% and on the mainland the Shanghai Composite lost almost 2%.

Thanksconsuming Day

The Consumer was out and shopping over the weekend lured by deals on everything from Consumer electronic to apparel. According to ShopperTrak, which tracks sales at more than 50,000 retail outlets, total sales rose 8.3 percent to about US$10.3 billion on Friday, the day after Thanksgiving compared with US$9.5 billion on the same day a year ago. ShopperTrak had expected a rise of no more than 4 percent to 5 percent. Internet research firm comScore reported a 22 percent gain in online sales on the day after Thanksgiving compared with the same day a year ago and estimated online sales would exceed $700 million online Monday, the official kickoff to the online shopping season.

Despite all the deals the costs for the holiday weekend are the highest in several years, with inflation just lurking around the corner. Merrill Lynch calculated a Thanksgiving cost-of-giving index using the prices of traditional holiday meal items such as turkey, cranberries, sweet potatoes and pumpkin pie, as well as the cost of flowers, gifts ranging from toys to clothing and electronics, plus gasoline, hotels, air fare, and greeting cards. The index has risen 7.9 percent year-over-year in the approach to the festive season, a huge swing from a drop of 4.4 percent a year ago. This is more than double the historical trend for this time of year and the second highest since 1999.

Overshadowing all the good news from the retailers are bad news on the credit front. A report by credit market analysts at Morgan Stanley states systemic financial risk is inordinately high. They also refer to Standard & Poor's estimate that total losses on subprime mortages could be up to 14 per cent. The report describes the number of downgrades of residential mortgage-backed securities as "shocking", saying agencies had taken 8000 ratings actions in 190 days from May 1. "Lack of investor confidence in credit ratings destabilises the system. AAAs are not AAAs," the analysts say. If this would not be enough already the report says they do not feel the accommodative central bank policy will fix the deep structural issues in the system."

Others are more optimistic. Thomas Barrack Jr., who founded Los Angeles-based Colony Capital in 1991 and purchased loans at discount prices during the U.S. savings and loan crisis, says it may soon be time to buy asset-backed securities. Colony isn't interested in buying subprime mortgages, instead might purchase beaten down securities backed by sufficient collateral such as loans to finance leveraged buyouts. ``The asset-backed derivatives market is still a falling knife and it will take a few quarters to narrow the gap between sellers' hopes and buyers' expectations,'' Barrack said in the Nov. 16 interview.

Over the weekend a Wall Street Journal report took aim at the looming problem of mortgage resets due to adjustable rate mortgages. In 2008 interest rates will be reset upward on $362 billion worth of adjustable-rate subprime mortgages. FDIC Chairman Sheila Bair is urging lenders to find ways to help borrowers keep their homes, and the issue is becoming a talking point among presidential and congressional candidates. The Mortgage Bankers Association estimates that 1.35 million homes will enter foreclosure in 2007 and another 1.44 million in 2008, up from 705,000 in 2005. The anticipated supply of foreclosed homes could add four months to the existing homes inventory and lead to a "fundamental shift" in the housing supply, according to Bear Stearns.

According to some a combined effort of politicians and lenders will be necessary to prevent a total collapse of the housing market. Some politicians are taking concrete steps. One of them is the governer of California. He has now moved to slow the rate of home loan defaults brought on by the collapse in the subprime mortgage market. Under Mr Schwarzenegger’s deal the four lenders Countrywide Financial, GMAC, Litton and HomeEq will extend for a “sustainable” period their low introductory rates on adjustable subprime loans to homeowners at risk of foreclosure. Federal officials are seeking further information on the California deal and could not indicate whether there might be any potential to extend this specific solution either state-by-state or nationally.

The mortgage problems are mirrored in a freezing up of the credit market. Fresh emergency action to pump funds into the money markets was announced on Friday night by the European Central Bank amid renewed fears that liquidity in the credit markets is again starting to dry up. The Federal Reserve is also providing more liquidity. The London Interbank Offered Rate or LIBOR, the lending rate banks charge each other, is still going higher. It is thirty basis points above its target, yet the gap is not as wide as in August.

Banks are still in the news on both sides of the Atlantic. French bank Natixis dropped 3.7 percent after it put the cost of the credit crisis at 407 million euros for its third-quarter results. Citigroup is planning major job cuts over the coming months to save costs, CNBC television reported on Monday. The cuts could total anywhere between 17,000 and 45,000.

Freddie Mac, the U.S. mortgage finance company that stunned Wall Street with a $2 billion quarterly loss earlier this week, plans to sell $5 billion of preferred stock in a deal to be launched as early as next week, the Wall Street Journal said on Friday. A spike in credit losses could result in Moody's downgrading the ratings on Freddie Mac's bank financial strength, subordinated debt and preferred stock ratings.

HSBC, Europe's largest bank, will bail out two structured investment vehicles, taking on $45 billion of assets to avoid a fire sale of bond holdings. HSBC said it doesn't expect any "material impact'' on its earnings or capital strength. HSBC's SIVs have more than $34 billion of senior debt, according to Moody's Investors Service, making it the second- largest bank sponsor of SIVs after Citigroup. The bank set aside $3.4 billion in the quarter to cover U.S.defaults from subprime loans, $1.4 billion more than it forecast in July. HSBC is the second bank to restructure its SIVs. Dusseldorf- based lender WestLB AG provided a credit facility to Kestrel Funding. HSBC's actions will restore a degree of confidence to sector, while providing a specific solution for investors in SIVs.

A group of investors led by pension fund Caisse de Depot et Placement du Quebec signed the so-called "Montreal proposal,'' accepting a standstill agreement while pursuing a restructuring of their CP market. The group is about to restructure about C$34 billion ($34.4 billion) in Canadian commercial paper and may meet its December deadline.

One of the major victims of the credit market turmoil is widely believed to be the dollar. As Investors and businesses have to deal with the dramatic demise of the dollar, the voices of dissent are becoming ever louder. From China to oil rich nations in the Gulf to European politicians and business nobody seems to be happy with this development in the world's reserve currency. After French premier Sarkozy warned of coming economic wars Airbus CEO Louis Gallois said that that the company must make additional savings of 1.5 billion euros due to the weak dollar. Earlier he warned that the level of the euro against the dollar threatened the life of the company, and that he might have to access funds provided by the government to cope with this situation.

The Canadian currency has also gained 21 percent this year and more than 59 percent against its U.S. counterpart in the past five years, prompting economists to slash their growth forecasts. The government of Quebec, where much of Canada's factory sector is based, on Nov. 23 said it will free up $628 million to help its manufacturers adapt to the new reality. The Bank of Canada, meanwhile, is hinting it may be poised to lower its 4.5 percent benchmark interest rate.

European officials are visiting in China this week. China Premier Wen Jiabao told French President Nicolas Sarkozy that the yuan's fall against the euro was due to the euro's rise in international markets. Wen also told Sarkozy that China will boost the flexibility of the yuan and push forward its foreign exchange reforms. China isn't in pursuit of an overly large trade surplus but seeks balanced trade, according to Liu Jianchao, spokesman for China's Ministry of Foreign Affairs. In a take it and give it EADS, the parent of planemaker Airbus, gained 2 percent after CEO Louis Gallois said the company has signed a framework agreement with China to sell 160 aircraft in a deal worth $16.7 billion at list prices.

Over night Japan's Nikkei was up 1.6% buoyed by strong retail sales and a resilient US consumer and Dubai International Capital took a "substantial" stake in Sony. Hang Seng jumped 4%. The only exception in Asia was the Shanghai Composite index down 1.4%. Europe traded higher in the morning but followed US futures lower. With central banks providing massive liquidity and credit markets worse than in August by some measures, it seems unlikely for stocks to move higher. Coming FED speak this week will also provide further insight, but with credit markets seizing up again one has to wonder about the efficiency of policymakers in this current financial episode.

Shop till you drop

Retailers are in focus today. It is Black Friday, traditionally the start of the holiday shopping season. Over the weekend we will hopefully find out if major retailers lifted themselves out of the red into the black numbers of profit. The number to watch will be the 6% same store sales growth of last years magic Friday.

Aside from retailers again in focus are bond insurers, which are on the brink of being downgraded by the rating agencies and therefore have capital work to do. There are concerns about the stability of FGIC, MBIA, Ambac Financial and their competitors, as well as the safety of the $2.4 trillion of securities they guarantee. The companies are being reviewed by Moody's Investors Service and Fitch. Financial Guaranty Insurance, the insurer for $315 billion of bonds, may get the capital it needs to avoid losing top credit rankings after French banks bailed out competitor CIFG Guaranty. Groupe Banque Populaire and Groupe Caisse d'Epargne agreed to take control of CIFG yesterday from their Natixis banking subsidiary and doubled the company's capital with a $1.5 billion investment.

H&R Block on Friday said the subprime lending unit it is trying to sell has obtained $350 million of new funding capacity from a unit of Royal Bank of Scotland Group. Separately, the company said its Block Financial Corp unit on November 20 drew down $100 million from two credit lines, giving it $1.725 billion out of a possible $2 billion outstanding. It was at least the fifth draw down since mid-August.

In the UK the mortgage market is further declining. The British Bankers' Association said the number of mortgage approvals for house purchases dropped to 44,105 in October from 52,685 in September, pressured by household finances.

The troubled sector in the financial services industry seems to get ever closer to a point where it might need some serious help. Could this help come from oil rich nations many ask? Six months ago, that question might have seemed almost laughable. But as oil price edges higher and Western credit markets are in pain, the idea is now being quietly voiced behind the scenes at some Western financial groups.

Nouriel Roubini in his Global EconoMonitor sees a " generalized systemic financial meltdown" heading our way.

A very bleak outlook indeed. While Roubini's article is sparse on numbers, loss about $500 billion plus on subprime, the Organization for Economic Cooperation and Development believes total global losses stemming from the U.S. subprime crisis could reach as much as $300 billion. Most of the losses will occur not in the form of mortgages themselves, but rather in the form of writedowns and fire sales of mortgage-backed securities repackaged within CDOs, they said. Obviously nobody knows the exact amount of the financial losses related to subprime. This is exactly the major problems in the credit market and the reason why banks are reluctant lending to each other and eager pumping up their balance sheets.

In Europe The risk of companies defaulting on their debt rose. Contracts on the iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings increased 4 basis points to 394 basis points. The iTraxx Europe index of 125 companies with investment- grade ratings rose 1 basis point to 63.

ECB Governing Council member Miguel Angel Fernandez Ordonez said he saw a stronger than expected slowdown in the euro zone and that there was not enough data to dispel uncertainty about the effects of financial market turmoil. The euro, after earlier almost hitting the 1.5 mark on the dollar, was knocked more than a cent off its peak.

The dollar fell to 107.68 Japanese yen, dropping below the 108-yen level for the first time since 2005, down from 108.62 yen late in Europe on Thursday. The dollar weakness leads to some worrisome developments. The New York Times reports on a growing trend in Japan among individual investors of reallocating funds invested in the U.S. to faster growing emerging markets. Japanese investors have reduced holdings of domestic mutual funds investing in the U.S. in 16 of the past 17 months. Japanese investors have invested the dollar equivalent of $17.5B into emerging market funds over the past year, while reducing holdings of North American funds by $4B.

Airbus, a unit of European Aeronautic Defense & Space, earlier this week warned that the level of the euro against the dollar threatened the life of the company. German Chancellor Angela Merkel told N24 television on Thursday that the strong euro and high oil prices pose a risk to the country's economy. Asked about future developments many see a trading band of 1.5 to 1.6 to the euro and decline to pin down a critical exchange rate. This could probably mean that we have further meaningfully downside ahead of us. Gernot Nerb economist from the Ifo Institute said Friday, The euro is fundamentally overvalued against the dollar, but market volatility is likely to persist.



The U.S. Thanksgiving holiday weekend kept many traders on the sidelines, while Japanese financial markets were closed Friday for the Labor Thanksgiving Day holiday. The Hang Seng rebounded 2%. European markets were also broadly up and future markets in premarket trading pointed to a higher opening in the US.

Panic mode?

Is the market capitulating? Everything is signaling that the market may switch to panic mode. The news flow is really bad so lets start with the more positive news first.

Japan's exports rose to a record in October as companies shipped more cars and electronics to Asia and Europe, easing concern that a slowdown in the U.S. will cool the economy's expansion. Shipments to the European Union surged 23.7 percent to 1.14 trillion yen, also the highest ever, today's report showed. Although exports to the U.S. fell 1.5 percent to 1.5 trillion yen the trend is up with a moderation from September's 9.3 percent drop.
In the US earnings reports were mixed again, but Deere, the world's largest maker of tractors and harvesters, said fourth-quarter profit climbed 52 percent, as demand outside North America countered slowing sales of construction equipment. Among retailers Abercrombie & Fitch said third-quarter profit rose.

On the housing front The National Association of Realtors saw the median price of single family homes down 2 percent in the third quarter. That is a less pronounced fall than reported by the closely watched Case/Shiller home price index. In addition they reported that in most municipalities home prices actually increased. Despite the median price decline homeowners have a median equity gain of 38.8 pct on their homes in the past six years.

Treasury Secretary Paulson said in Tokyo the number of potential U.S. home-loan defaults "will be significantly bigger" in 2008 than in 2007, because 2006 mortgages had lower underwriting standards, no amortization, and no down payments. What else is new. He is "aggressively encouraging" the mortgage-service industry to provide help "broadly" to struggling borrowers of resetting adjustable rate loans, instead of an earlier strategy of handling problems individually case-by-case. Currency traders in Tokyo cited Paulson's comments as a factor in the dollar's fall to a two-year low against the yen.

The Fed minutes of its end October meeting was in focus yesterday and reverberates overnight into todays markets. The Federal Reserve's first set of quarterly economic forecasts fueled speculation that it will cut interest rates again, contrary to warnings by policy makers in the past two weeks. The focus in the minutes is on the downside risks to growth, which contrasts with an optimistic inflation forecast. The dollar plunged and Commodities surged after the release of the minutes. Futures contracts on the Chicago Board of Trade showed a 90 percent chance the Fed will lower its target rate a quarter- percentage point to 4.25 percent next month and 77 percent odds of a further cut to 4 percent in January.

Bank of England members Blanchflower and Gieve voted for a cut in interest rates, as revealed by the minutes of the November meeting, on fears that money markets may become tighter as the credit crunch persists. This underscores how important credit markets are these days for central bankers decision making. The Fed between a rock and a hard place will not have much of a choice but to lower rates on its upcoming meeting. It will be interesting to see what policymakers have to say next week on their busy schedules.

FRE reported a 2 billion dollar loss on their mostly prime mortgage portfolio yesterday, which tanked the stock and the entire market with it. Freddie Mac may need to raise as much as $6 billion to bolster its capital by slashing its dividend or selling preferred stock. Fannie Mae last week raised $500 million from the sale of preferred stock after reporting a third-quarter loss of $1.4 billion. A preferred stock sale that would be meaningful to manage their capital comfortably would most likely result in a ratings downgrade. Bond insurer MBIA last month halted its share buyback after reporting its first ever loss. Citigroup also suspended its stock repurchases. California-based mortgage lender Countrywide sold $2 billion of preferred stock to Bank of America Corp. in August.

The financial services industry is shoring up their capital ratios to weather the storm that is brewing over their heads. Mortgage insurers are further under scrutiny on the adequacy of their capital base and their potential losses. ACA Capital Holdings will likely be the first bond insurer to have its credit rating cut, forcing banks to take on as much as $60 billion of collateralized debt obligations. This would have widespread implications not only for banks but also for municipalities which have their bonds insured with these institutions. ACA has insured bonds with a par value of $7.1 billion.

Mitsubishi Financial, Japan's biggest publicly traded bank, posted a 63 percent decline in second-quarter profit on losses at a credit-card unit and investments in the U.S. mortgage market. Losses on investments related to subprime U.S. lending swelled to 23 billion yen at the end of October, from 20 billion yen a month earlier. Losses on such investments erased 4 billion yen of profit in the first half. Mizuho said last week credit market losses may swell to 170 billion yen this year. Wall Street's largest firms have reported $50 billion in writedowns so far.
Further underscoring the global and far reaching nature of this financial crisis comes from Norway. The Norwegian government has launched probes into loss-making U.S. investments made by Norwegian towns. They bought notes, which were based on debt issued by U.S. cities and states. To boost returns the mostly high grade investments were leveraged by short-term loans taken out by the four towns.

In the meantime market internals are deteriorating. The three-month London interbank offered rate for pounds, which shows the cost of lending between banks, rose to a two-month high of 6.52 percent today. The London interbank offered rate for dollars climbed 2 basis points today to 5.02 percent, the highest since Sept. 18. Three-month Libor for dollars has increased to 1.89 percentage points more than Treasury bill yields of the same maturity. The TED spread is the widest since Aug. 21 and up from 0.94 percentage point on Oct. 15.
In morning trade Treasuries surged, sending 10-year note yields below 4 percent for the first time in more than two years, as a decline in global stocks spurred demand for the safety of government debt. The spreads on two-year U.S. interest rate swaps widened to record levels Tuesday on growing credit fears and rising short-term interbank loan rates. The two-year swap spread traded as wide as 101.25 basis points before settling at 97 basis points versus 96 on Monday. The last record spread was 97 basis points in March 1989, during the savings-and-loan crisis.

Asian stocks fell sharply Wednesday as concerns spread that the U.S. economy would continue to weaken. The Nikkei 225 stock index sank 373.86 points, or 2.46 percent, to close at 14,837.66 points, its lowest point since July 24, 2006. Since the start of November, the index has dropped 13.1 percent. Hong Kong's benchmark Hang Seng index tumbled 1,153.02 points, or 4.15 percent, to 26,618.19.

In Europe, major markets were also lower in midday trading. France's CAC-40 fell 2.01 percent, London's FTSE 100 Index fell 1.4 percent, and Germany's DAX was down 1.74 percent. European bank shares led the decline. The Markit iTraxx Financial Index, a benchmark for the cost of protecting the bonds of European banks and insurers, rose 6 basis points to 63.5, the highest since its start in 2004. Icelandic banks have the highest risk of default among European lenders. Barclays and Zurich-based UBS have the biggest risk outside of Iceland. Contracts on London-based Barclays, which last week reported writedowns of about $2.7 billion, have risen to 70 basis points, a tenfold increase since June. UBS, which announced $4.4 billion of writedowns last month, rose 2 basis points to 66.
The cost of contracts on the Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings increased 17 basis points to 402 basis points, the highest since August.

In the currency markets the yen climbed as high as 108.89 per dollar overnight, the strongest since September 2005. It has risen 5.7 percent against the dollar and 3.2 percent versus the euro this month. The dollar fell to $1.4856 a euro today, the weakest since the single European currency's debut in 1999.

Ahead of a report of crude inventories crude oil rose above $99 a barrel for the first time as a slumping U.S. dollar made crude cheaper to foreign buyers. Futures rose to within 71 cents of $100 as the dollar fell on speculation the Federal Reserve will cut interest rates for a third time this year.

Freddie's subprime mess

Freddie Mac posted its largest ever quarterly loss on Tuesday. Third quarter net loss more than doubled to $1.39 billion. The loss was caused by a $2.24 billion decline in the value of derivative contracts and $1.2 billion in credit losses among the $2.7 trillion of mortgage assets. A slump in the value of mortgages reduced core capital to $600 million more than its regulatory requirements, prompting Freddie Mac to seek more money. The company also said it may cut its dividend. The announcement caused futures to decline in premarket trading.

In Zurich speculation swirled that UBS might be forced to cut its dividend to protect its Tier 1 capital. This comes after the company confirmed last week that it expects growth to be profitable in the coming quarters. Rumor that Citigroup will have to cut its dividend forced the stock to move sharply lower last week. Jan Hatzius from Goldman Sachs estimated that lending might be constricted by 2 trillion dollar because banks have to shore up their capital ratios.

Another company that is in trouble because of its involvement in the US mortgage market is H&R Block. The mortgage crises claimed a new high profiled CEO as Mark Ernst resigned after the companies sale of its money losing mortgage lending business collapsed.
Regional banks seem to come clean with their subprime exposure as well. Milwaukee-based bank Marshall & Ilsley said Monday it has a $282 million exposure to troubled residential mortgage lender Franklin Credit Management Corp. Although it did not expect any potential losses on the mortgages to be material to the $8B company's financial results.

Problems with mortgage lenders are mounting in the UK. The third-biggest lender, Paragon faces "unattractive'' credit costs following the collapse of the U.S. subprime mortgage market. Its 3Q profit fell and it may need to raise 280 million pounds ($547 million) in a share sale. Paragon said it has an agreement with Zurich-based UBS, supported by shareholders, to underwrite the sale of new shares. The company won't pay a final dividend this year. Bradford & Bingley, the U.K.'s biggest lender to landlords, sold 4.2 billion pounds ($8.7 billion) of home and commercial property loans to improve cash flow as credit costs increase. It also sold a portfolio of commercial loans at a discount to book value for 2 billion pounds to GE Real Estate. The bank reiterated earlier this month it continues to raise money on the capital markets and is ``well funded.''

In Germany reinsurers confirm their involvement in the US subprime crises after Swiss Re reported an unexpected loss yesterday. The big three did not change their earlier made maximal loss assumptions from their subprime exposure.
Just adding to the financial problems in Europe are a series of worker strikes in France and Germany. Civil servants, from teachers to postal workers, began a mass walkout across France on Tuesday, the seventh day of a transport strike, but the government said it wouldn't cede on planned reforms.

Asia has its own mortgage problems after Bank of China reported substantial losses on credit derivatives, although their exposure to the US subprime market seemed to be smaller for now. The bigger problem in Asia is overheating of their economies. Transactions in Shenzhen's primary property market slumped 40 percent in October from the previous month as banks refused to arrange new mortgages after using up their credit for the year, according to a mainland property consultant. Housing prices surged some 30 percent on average for the first three quarters of the year to 13,000 yuan (HK$13,634) per square meter.
Leaders of the Association of Southeast Asian Nations will today agree to eliminate trade barriers for goods and services in an attempt to create a European Union-modeled economic community by 2015.

The good news came from Hewlett-Packard. The world's largest computer maker issued a better than expected quarterly profit on Monday. The company also increased its outlook which is driven by strong sales of notebook computers. Shares of upscale retailer Nordstrom rose 11 percent to $33.90 in extended trade on Monday after the retailer reported results that beat estimates. The discounter Target reported an unexpected decline in quarterly profit. Higher housing and gasoline expenses forced the consumer to cut back on spending. If the consumer is hanging in the chances of a recession are very small. A survey conducted by the Consumer Federation of America and Credit Union National Association says says 35% of consumers expect to spend less than usual on holiday shopping this year, the highest figure in the survey's eight-year history and up from 32% last year. Bill Hampel, chief economist at CUNA, said: "The bottom will not fall out of retail but it will be softer."

The bottom will also not fall out of the troubled credit derivatives market as greed trumps fear on Wall Street. New York-based Kohlberg Kravis Roberts, Schwarzman's Blackstone Group and Black's Apollo Management are raising money for collateralized loan obligations that will buy the assets for as little as 95 cents on the dollar. Morgan Stanley, Citigroup and their Wall Street competitors financed at least seven private-equity CLOs in the past two months. Although the bottom is not falling out new CLOs tumbled to $68 billion since June, from about $127 billion in the first six months of the year. Fears of credit contraction are emerging on Wall Street. How this will impact mainstreet will determine the future direction of capital markets.

Tokyo shares reversed a morning slide to close higher on Tuesday. The Index ended up 1.1 per cent at 15,211.52 after dropping as much as 1.9 per cent. The broader Topix index was up 0.9 per cent at 1,469.27. TheNikkei was buoyed by news that JC Flowers, the US buyout firm, would buy a third of Shinsei Bank for $1.8bn. The investment will shore up Shinsei's capital after the first loss since Flowers and partner Timothy Collins acquired the then-bankrupt bank from Japan's government in 2000. In Hong Kong the Hang Seng index also recovered from early losses and closed up 1.13% on the day.

The dollar tumbled overnight with the euro reaching a new all time high against the dollar on news that currency rich Golf states might drop the peg. The dollar peg has "served the economy very well in the past," said Sultan Nasser al-Suweidi, the governor of the United Arab Emirates' central bank, last week. "However, we have reached a crossroads." Dollar bearish was also rumor about an imminent inter-rate cut by the Federal Reserve, which makes the minutes of the last meeting ever more important. Light, sweet crude for January delivery on the New York Mercantile Exchange rose 95 cents to $95.59 a barrel in electronic trading by mid-afternoon in Europe.