insto - Australian financial markets

US led markets into a retreat as wary investors awaited the Federal Reserve's assessment of the US economy after a 1.8 percent surge in the November Producer Price Index. Among the major US indices, the Dow was off 49 points to close at 10,452; the Nasdaq lost 11 pts to 2,201 and the S&P 500 closed at 1,108 (down 6 pts, or 0.55 per cent).

The Fed has kicked off a 2-day policy meeting, with a statement on the economy expected on Wednesday US time (tomorrow night our time). According to Reuters, although the market does not anticipate any changes in the Fed's policy of holding US interest rates near zero, even a small change in tone can have an impact on investors' mood because cheap money has been one of the main drivers of the stock market's rally.

Financials pushed the broader market further downwards as reports showed a rise in credit-card charge-offs and Wells Fargo became the latest big US bank to announce plans to repay TARP funds, via a US$11bn equity raising.

Markets reacted positively to the news that the first sovereign default on sukuk bonds, will be avoided by a US$10bn (A$11bn) loan by United Arab Emirates’ central bank to Dubai. This comes just in time as Nakheel, the real estate arm of the state-backed conglomerate, Dubai World, was due to pay about US$4bn under an islamic bond contract from today.

At the close, the Dow Jones was up 30 points to 10501, while the Nasdaq declined half a point to 2212 and S&P 500 added 4 points to stand at 1114.

Bonds decline
US short dated treasuries fell on Monday (yields higher), as investors switched from safe-haven bond into equities following the Abu Dhabi bailout, CBA noted this morning that. US 10yr yields remained steady at 3.55 per cent with US 2yr yields up 4pts to 0.84 per cent.

It was a mixed night for offshore markets overnight. The Dow dipped ever so slightly (-19 points to 10453) and S&P 500 was flat at 1109. Meanwhile, the Nasdaq (+9 pts to 2185) was given a boost by a good result from online book retailing giant Amazon.com and a 1 per cent rise from Apple.

With no news of major significance and the furore over Dubai’s standstill request fading, markets were flat, locking in recent day’s gains.

NAB noted this morning: “The Federal Reserve’s Beige Book reported that the US economy has ‘improved modestly’ in the past two months. Consumer spending has picked up moderately since October, while manufacturing conditions were also improving slowly. Residential housing activity was off its lows, but commercial real estate markets were weak, and in many cases, deteriorating. The labour market remains weak and there was little indication of any wage and inflation pressures.”

The decision by massive state-backed conglomerate, Dubai World, owners of real estate developer Nakheel, to seek a 6-month debt standstill has sent shockwaves through financial markets. Dubai World has about $60bn in liabilities and is responsible for about 50 per cent of the oil-rich city-state’s economy.

The news sent bourses crashing 3 per cent, the largest single day’s fall since March. Bond prices were pushed upwards as investors sought refuge, although Dubai has large bond liabilities – the first to be tested will be Nakheel’s US$3.5bn bond payment next month.

Mildly positive news from the US and a weaker dollar pushing up USD-denominated commodities prices saw the major offshore share markets edge up by at their respective closes.

At the close, the Dow was up 30 pts at 10464; the Nasdaq at 2176 (+7) and the S&P 500 was at 1,111 (+5).

Markets overnight saw mild softening before heading back towards – but not quite reaching – yesterday’s 14-month high points.

Perpetual Trustees (PTCo) came a step closer to recovering the $125 million frozen from Mahogany Capital (Mahogany) noteholders since the collapse of Lehman Brothers, following its second successful court ruling in the United Kingdom late on Friday (UK time).

PTCo commenced legal proceedings six months ago against the UK-based BNY Corporate Trustee Services (BNY) to recover “collateral” which could be used to repay Mahogany noteholders.

The International Organization of Securities Commissions’ (IOSCO) Technical Committee has published a major report: “Unregulated Financial Markets and Products – Final Report”. The report was prepared by a task force which included Tony D’Aloisio and Greg Medcraft from the Australian Securities and Investments Commission (ASIC).

IOSCO’s report recommends regulatory actions to assist financial market regulators in introducing greater transparency and oversight with respect to securitisation and credit default swaps (CDS) markets, along with improving investor confidence and the quality of these markets.

The last time INSTO caught up Asia’s head of credit derivatives structuring at BNP - Cedric Podevin in August 2007, structured credit was at the epicentre of the first shockwaves of the ensuing credit crisis.

Now over two years later the industry is working hard at re-inventing itself to ensure it remains a sustainable and functioning component of credit markets.

Global response, local reaction

In early July, Insto magazine and Mallesons hosted a roundtable on future financial markets regulation, with participation from a wide-cross section of the industry.