A Quick Run over the last few days in the world of Finance

The financial markets around the world have gone in complete chaos after the exposure of sub prime mortgage crisis and the resultant loss looming over the investment houses. This has caused panic amidst the investors who have grown nervous and don’t really know what to do with their money. This has been caused primarily because the investors bought anything and everything during the Bull Run at prices which did not reflect their true risk.

Late payments and defaults on US mortgages have reached their highest level in more than five years, prompting sharp falls in the value of mortgage-related securities and severe funding problems for lenders.
Economists predict that disorder in the financial markets has diminished the chances of recovery by the US housing sector after figures showed home construction activity fell last month to its lowest point in the decade which would prolong the housing slump.

The commodity prices led by Oil, Nickel and Copper declined on concerns of slow economic growth and demand for raw materials due to the growing losses in the credit market.

Investors are favouring Government Securities over Mortgage Backed Securities, Asset Backed Securities and also high grade corporate bonds, as they are moving towards more defensive position. The fear in the markets is making investors pile up short-term US government debt, thereby tumbling the yields on the Treasuries.
As on July 26, the Corporate and High Yield bond issuance stood at $31 billion (with 80% denominated in USD) in the first half of 2007 compared to total volume of $38 billion last year.
The ever-increasing demand for Treasuries due to the relative safety on government bonds has pushed 2 year yields to the lowest in 22 months. The yield on the 3 month T-Bill has fallen to 3.73 percent, it’s lowest since July 2005.


The situation has worsened due to the rise in Japanese Yen, where Dollar has fallen to 4 months low against Yen on growth concerns which have resulted in the discontinuation of carry trades from Japan. The more the Yen appreciates, the more the people would square off their investments which would further deteriorate the situation.
(Money borrowed in Japan where the benchmark interest rate was 0.5 percent, was being invested in economies offering higher returns, weakening the yen. New Zealand, where the key rate was 8.25 percent, had seen its currency driven to a 22 year high by the Yen Carry Trade. Thailand baht had surged to its highest since the Asian financial crisis a decade ago, as had the South Korean won.)

The turmoil in the currency markets which has led to the strengthening of the local currencies in the South East Asian economies would leave them disadvantaged against their competitors towards export. This would be further worsened by the lowered demand caused by the slowdown in the US economy.

The Fed, European Central Bank and other Central banks around the world have constantly been pumping cash to maintain the liquidity in the system. They have added more than $300 billion in their financial systems through distressed banks. (Till now US central bank has pumped in more than $76 billion to help troubled banks).
Russia’s central bank also joined the efforts to ease fears over the global liquidity crunch; by injecting $1.67bn into the country’s banking system on Thursday.
Russia was likely to withstand the turmoil in global financial markets due to the relatively low leveraging of Russian companies and also due to the high oil prices which has helped to fuel its economic boom.

The Fed Reserve has unexpectedly cut the discount rate to mitigate the damage to economy from the disorder in global credits markets. The central bank reduced the rate at which Fed makes direct loans to banks by 0.5 percentage point to 5.75 percent.

Investment Banks across the world are having real hard time trying to cope with losses due to hedge fund operations. Goldman Sachs was trying to rescue its $3 billion from one of its hedge funds which had suffered losses following slump in equity market.
JP Morgan & Chase, the biggest lender in the LBO market, is expected to lose about $1.4 billion on loans it can’t sell because of the credit crunch.
JPMC is stuck with $40.8 billion of LBO debt, while Goldman Sachs is holding $31.9 billion and Deutsche bank has $27.3 billion. JPMC and Goldman Sachs were among banks that last month failed to sell $20 billion of loans for the LBOs of UK drugstore Alliance Boots Plc and carmaker Chrysler LLC.

London experienced the biggest one day loss in past four years, ignited by selling on Wall Street amidst fear of US slowdown, plummeting FTSE by 250 points, which is more than 4 percent decline.
Investors have been fleeing Asian and European stocks, pushing the markets in red.
Amid this crisis the Bombay Stock Exchange Sensex nosedived by 642.70 points (more than 4%) – the largest single day fall in over 4 months. The FIIs (mainly Hedge Funds) had sold around Rs 3100 crore on Thursday – the highest single day sales by foreign funds as of date.
South Korean, Taiwanese and Indonesian markets also closed 5 to 7% lower.
However bankers and investors in Asia have been quite confident about the resilience of the region from the current mess due to the strong fundamentals and limited overall exposure to US sub prime mortgage market. Therefore there is little sign that this trouble would cause a great slowdown in the emerging markets.