Business | Markets
Inflation makes world credit markets weaker
Fears that central banks around the world were planning a crackdown on rising inflation led to sharp moves across most asset classes last week.
- HSBC Dubai Fixed Income Trading
- Published: 00:06 June 15, 2008
Abu Dhabi: Fears that central banks around the world were planning a crackdown on rising inflation led to sharp moves across most asset classes last week.
Hawkish statements by both the Fed chairman, who warned of growing inflationary pressures, and the European central bank president, Jean-Claude Trichet, caused a dramatic shift in interest rate expectations. The Bank of Canada also surprised the market by leaving rates unchanged, again citing the risks of rising inflation.
The US Dollar Index hit a three-month high on the back of possible US rate hikes later this year, and the US Treasury yield curve flattened as yields at the short end of the curve rose. Two-year Treasury yields increased 69 basis points whilst 30-year yields rose only 16 points.
Subprime fallout
The subprime market collapse continued to haunt financials last week, with a total of $386.7 billion in writedowns and credit losses now reported globally. Lehman Brothers disclosed a second quarter loss while simultaneously announcing a rights issue.
Lehman attempted to calm the market by reporting second quarter earnings a week early and replacing both its CFO and President. However, Lehman stock still ended the week down 30 per cent.
Local markets also suffered from volatility as foreign investors reduced their credit exposure at the start of the week. The HSBC/DIFX Sukuk Index moved seven basis points wider on Tuesday and continued to test recent wides.
The US subprime and credit crises are also affecting local banks, with Gulf Investment Corporation (GIC) the latest to suffer further writedowns, according to the Middle East Economic Digest.
Unofficial sources were cited as saying that GIC may write down another $200 million this July, in addition to the $246 million written down last year. GIC bonds have been well offered since their first writedown announcement, with the 2010 bonds currently yielding around 175 basis points over Libor.
Comments from Federal Reserve chairman Ben Bernanke opened the possibility of a rise in US interest rates. Dirham-denominated bonds closed the week 2-5 basis points wider, with the dollar heading for its biggest weekly gain in three years and taking pressure off the GCC central banks.
Overall, investor appetite for GCC debt remains healthy, as local issuers continue to tap the market. Doha Bank announced plans to issue $1 billion of Islamic debt in the first quarter of 2009, with the proceeds to fund the Gulf's first exchange for carbon credits.
Furthermore, Abu Dhabi National Energy Company (Taqa) approved the sale of Dh4.15 billion of convertible bonds last week, with a conversion date of September 1 this year.
Taqa's aggressive expansion plans include investments of $5 billion this year, together with a tripling of assets to $60 billion by the end of 2012.
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