Swiss Re reports loss on credit derivatives

Goldman Sachs analysts downgraded Citigroup to "sell" and said the largest US bank may have to write off 15$ billion for debt losses over the next two quarters, and placed it on "Americas Sell List". This once again underscores that the credit crises that started in August is far from over. Swiss Reinsurance, the world's biggest reinsurer, had a 1.2 billion Swiss franc loss on derivatives in October. The loss came less than two weeks after the company reported third-quarter profit that surpassed analyst estimates. Financial institutions adhere to their "salami tactic" and keep surprising the market which is not helpful. On the other hand Swiss Re "remains committed" to its share buyback program and reiterated targets for earnings-per-share growth of 10 percent and ROE of 13 percent over the course of this reinsurance pricing cycle. Lets hope there will be no further surprises.

In Germany market turmoil has once again hit IKB, the regional bank that was among the first victims of this summer's credit market crises, KFW the state owned German bank that owns 38 percent of IKB, reported. The market losses could render the $5.1bn rescue package insufficient.

Europe's financial services industry, and especially the property sector, has been hardest hit by the global credit squeeze, according to purchasing managers indices published on Monday. Evidence has started to mount that the global credit squeeze is beginning to have a significant macroeconomic impact across Europe. This makes the EZB's rate decisions even harder, since rate setters are under pressure from rising inflation and mounting evidence of a macroeconomic impact from the current credit market crises. The EZB has been on hold in its last two meetings.

The reemergence of credit market problems are reflected in the interbank market. The cost of borrowing between banks in the UK rose in both a three-month and overnight basis, as concerns over funding in the financial sector increased. LIBOR rose to 6.45 from 6.40 on Friday for the Three month contract. The fixing had been at 6.34 on Thursday.

The headline in the financial futures market these days says Federal Reserve Chairman Ben Bernanke is withholding some vital information: The economy is so bad the central bank will have to lower interest rates at least three-quarters of a percentage point to avoid a recession. For the first time since 2001, yields on Treasuries maturing from three months to 10 years are below the federal funds rate. Five of the past six times that has happened, the economy entered a recession, data compiled by Bloomberg show.

The outlook for the global economy still seems healthy. A Bloomberg report states that the global market for dry-bulk cargo shipping will probably remain tight next year, supported by congestion at ports and rising demand for commodities in Asia. The Baltic Dry Index, an overall measure of the cost of transporting commodities, has surged 164 percent in the past 12 months.

Despite the continued strength in Asian economies a top-performing newsletter turns bearish on Chinese stocks. Cabot China & Emerging Markets Report over the past five years, for example, it's up 27.57% annualized vs. 15.23% annualized for the total-return DJ Wilshire 5000. The Shanghai Composite Index was down 0.87% on Monday. The Wall Street journal reported on Monday that the Chinese government has asked banks to temporarily freeze lending until the end of this year to help cool its economy.

Asian stock markets were largely lower on Monday reversing early gains amid lingering worries about the state of the US economy. Japanese stocks continued their decline, with the benchmark Nikkei index falling for a third straight day, by 0.7 per cent to 15,042.56, a 16-month low.
European indices were lower across the board on Monday, with the CAC down 1.6%, the DAX down 1.41% and the FTSE down 2.6%.
The US futures market was also down in morning trading with the S&P down 6.8pts before the market opened.

G20 and OPEC meeting on the weekend

The group of 20 finance ministers and central bankers met in South Africa this weekend. They noted in their communique that the downside risk to the near term outlook for global growth had increased and named the culprit as the recent financial market turbulence. Economists, central bankers and finance ministers from Europe to South Africa expect slower growth ahead. This is not supported yet by economic statistics but is plausible given the current turbulences in the credit markets and their expected knock on effects. The slump in global credit markets will force banks, brokerages and hedge funds to cut lending by $2 trillion, triggering the risk of a ``substantial recession'' in the U.S., according to Goldman Sachs report that come out last week.
South African finance minister Trevor Manuel, this years host of the G20 meeting, said that all of the G20 members ascribed to the notion of an expansion of the so called Group of Seven. "it's time for a new arrangement in the world," he told reporters.

The world has also changed some for those who have to deal with a weak dollar. This weekends OPEC meeting had Iran and Venezuela proposing trading oil in a basket of currencies to replace the historic link to the dollar, but they had not been able to generate support from enough fellow OPEC members. The final declaration delivered Sunday did not specifically mention concern over the weak dollar.

Over the pond UK house prices grew at their weakest annual rate for 17 months in November according to online estate agent Rightmove. House prices were down 0.7% on the month but were still 7.9% higher on the year. The fear of a US style housing slump is growing. In the meantime the Institute of Chartered Accountants of England and Wales said yesterday that its business confidence index plummeted nine points last quarter from +4.9 to -3.9, suggesting respondents are becoming markedly less confident in future prospects.

Singapore on the other hand is confident about the outlook for the economy and has lifted its growth forecast for 2007 and 2008 on strong Asian and European growth and somewhat weak growth in the US, the ministry of Trade and Industry said Monday.

To help cool the Chinese economy the Chinese government has asked banks to temporarily freeze lending until the end of this year, the Wall Street Journal reported on Monday.