Who Cares About Subprime Losses?

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By Greg Peel

A couple of months ago Citigroup announced its losses on mortgage related securities would likely total a further US$8-11bn on top of the US$6bn it had already accounted for. The market went into meltdown, suddenly realising that the credit crunch was not over but getting worse. Last month the mood in the heavily sold-down US financial sector changed considerably when an Arab sovereign wealth fund took a 5% stake in Citi for an 11% coupon, thus alleviating precarious capital issues.

Last night Swiss banking giant UBS announced it would write down a further US$11bn in mortgage related security valuations. This could tip UBS into a loss for the full year. But at the same time, the bank announced an $11bn injection of funds from a combination of a Singapore sovereign wealth fund and an unnamed Arab investor. The injection represents a 9% stake and the largest single shareholding. For their trouble, the investors would receive a 9% coupon.

UBS, and all financial stocks, rallied on the news. No longer is the market scared of major subprime write-downs it would seem. Apart from the fact that full disclosure of losses is something the market has been crying out for anyway, it appears that around every corner are cashed up investors ready to pounce. The new buzz acronym on Wall Street is “Chime” – China and the Middle East. (At a stretch you could call Singapore pseudo Chinese). Forget your BRICs and Chindias, its time to keep an eye out for cavalry investors from Chime.

There was more good news on the Street as well, when the US National Association of Realtors announced pending home sales rose 0.6% in October – the second consecutive rise following months of falls. The Association is also tipping a modest bounce in US house prices in 2008. This puts it at odds with just about everyone else who thinks house prices are accelerating to the downside, but you should always trust a real estate agent to give you the story straight.

The Dow closed up 101 points or 0.7%. The S&P added 0.7% and the Nasdaq 0.5%. At the end of the day, speculation over a Fed rate cut tonight has Wall Street in a buoyant mood. Traders are still arguing as to whether a 25 or 50 point cut will be forthcoming.

To complement the UBS capital injection news, shares in MBIA – the mortgage insurer which was looking like losing its AAA rating and which had been trashed as a result – shot up over 10% when it was announced a private equity firm would inject US$1bn of capital and save the day.

Further adding to positive sentiment was a newspaper report that private equity firm Blackstone had joined the race for Rio Tinto ((RIO)). See  story “Blackstone Denies Rio Rumour” earlier this morning.

The increasingly volatile oil price shot up in early trade as news flowed in of fog on Houston’s shipping channel, but the US$90 mark proved tough resistance and oil soon turned as reports suggested some mild winter weather ahead in the US in the short term. Oil eventually closed down US42c at US$87.86/bbl.

Anticipation of a Fed rate cut also crept back into the US dollar which had been stabilising somewhat of late. The dollar fell against the euro and pound but rallied slightly against the yen. The fall was enough to push the Aussie higher, up about three-quarters of a cent to US$0.8848 on the overnight mark.

The big move came in gold, however, which shot up US$14.10 to US$808.50/oz. This was again put down to Fed speculation and positioning ahead of what many expect to be the first in a string of cuts. Such speculation should be confirmed by the Fed’s accompanying rhetoric. Gold has now done its work in consolidating the 800 mark and traders believe the right talk from the Fed could see the metal go for another run.

After a bit of a bounce recently, base metals were weaker in London despite a lower dollar and a strong gold price move (which in turn came despite weaker oil). Traders suggest activity will now slow on the LME, opening up the market to additional volatility in the wind-down to Christmas. Lead was the big loser, closing down over 5% while copper, nickel and zinc all took hits.

The SPI Overnight rose 33 points.

Bring on the Fed.

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