Business | Markets
Credit markets see high volatility
Raft of negative economic headlines from the United States affects sentiment.
- HSBC Dubai Fixed Income Trading
- Published: 00:09 August 3, 2008
Abu Dhabi: Credit markets were focused last week on a raft of negative economic headlines from the US. Further writedowns from Merrill Lynch, a bankruptcy filing from IndyMac Bancorp and low GDP numbers lent the financial sector a negative tone.
Although local credit markets ended the week roughly unchanged, they too experienced volatility.
Merrill Lynch announced a further writedown of $5.7 billion last Tuesday, combined with a $8.6 billion rights issue to bolster its capital. Sovereign Wealth Funds continue to support the US financial industry - this time it was the Singaporean government investment fund, Temasek, that stepped in with a $3.4 billion investment. Merrill also sold a large chunk of its remaining CDO portfolio for $6.7 billion, heavily discounted to its original price of $30.6 billion.
We also saw two more signs that the credit crunch is beginning to extend to the rest of the US economy. First, the US second-quarter GDP numbers came in at an annualised 1.9 per cent, below market expectations of 2.3 per cent.
Second, US auto giant GM announced a $15.5 billion loss for the second quarter.
Despite the HSBC/ DIFX Indices (www.hsbcdifxindices.com) ending the week unchanged, regional credit markets were volatile. Flows were dominated by a re-pricing of Middle Eastern corporate debt following the new Taqa 2013 and 2018 bonds.
Both new Taqa issues had been priced 50 basis points cheaper than similarly dated existing issues, causing a rapid sell-off in other corporate bonds. The subsequent normalisation of the Taqa curve last week brought some order back to the market. Both the 2013 and 2018 bonds tightened around 20 basis points, underpinned by strong demand from institutional and retail investors.
Further issuance is expected, and as new issues are priced at a discount the region will continue to offer good value in both the primary and secondary market. Commercial Bank of Dubai is one of several issuers who have confirmed their intention to tap the bond markets this year.
Dirham-denominated debt ended the week 10bps wider with institutional clients generally better sellers. A large amount of recent issuance has weighed on the market, coupled with investors pricing in a lower probability of revaluation.
Positive earnings
Regional names continue to buck the global earnings trend with positive, in some cases record breaking, announcements. The financial sector in particular has posted earnings growth averaging 30-40 per cent.
Regional bond markets have yet to react to the earnings announcements though, as these strong fundamentals are overshadowed by weakness in other markets.
To summarise the recent bank earnings: Dubai Islamic Bank reported a first-half net profit of Dh1.3 billion versus Dh888 million; Mashreq Bank reported a 38 per cent increase in net income to Dh706.8 million; Bank Muscat posted a half-year net income of 57.8 million riyals compared to 40.2 million riyals; Bank of Bahrain and Kuwait recorded a second quarter net income of 13.09 million dinars versus 9.94 million.
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