New credit crunch looms

The dollar soared as US investors liquidated foreign holdings, ending at $1.4129 against the euro and £2.0276 against the pound, in one of the most dramatic currency moves this year. Libor spreads in Europe’s interbank market jumped to 64 basis points, roughly the level that set off the credit crisis last summer and prompted a liquidity rescue by the European Central Bank.

The iTraxx Crossover index that measures spreads on corporate bonds has jumped 100 basis since last week to 364 yesterday. “It’s the summer that won’t end,” said Peter Berezin, a strategist at Goldman Sachs. He said investors were shaken by last week’s drop in US home-builder sentiment to an all-time low and by fresh falls in the ABX index for sub-prime debt. “We continue to learn that it pays to respect the sell-offs in ABX and housing-related credit. This has elements of the February and August sell-offs, where credit markets signalled problems,” he said. The lowest tier of ABX debt has fallen to a record low of 20.72 – from par of 100 – pointing to huge losses that have yet to surface.

Wall Street yesterday avoided a repeat of Black Monday, eking out a recovery after the Dow’s 368-point dive on Friday. The fall-out triggered tumbles in Tokyo, Shanghai, Hong Kong, Indonesia, Korea, Taiwan, and Turkey. Lead, copper, zinc, and nickel all fell hard on growing fears of a global economic slowdown, while gold dropped $13 to $754 an ounce. Brent crude fell 61 cents to $83.18. There are concerns that a $75 billion rescue operation put together by US Treasury Secretary Hank Paulson to stabilize the sub-prime market is intended to mask the scale of the crisis. “This rescue has back-fired,” said Hans Redeker, currency chief at BNP Paribas. “The central banks don’t want anything to do with it. There is a fear that the big four US banks are trying to hide their debts,” he said. The US market for asset-backed commercial paper (ABCP) contracted a further $11 billion last week as lenders refused to roll over short-term debt. This form of paper has shrunk by 25% since August, cutting off almost $300 billion of funding. Dr Suki Man, an analyst at Société Générale, said “shutters” had gone up across the debt markets. “Has it just got ugly again? The jury’s out, but it’s enough to make one feel the chill. All this is offset by a US economy still expected to grow by more than 2%, and China and India still growing at breakneck speed,” he said.

Redeker said yesterday’s dollar spike was caused by US investors pulling money out of Turkey, South Africa, Hungary and other emerging markets. They had invested $300 billion in bonds and stocks over the last year. “This is just profit-taking on risky assets. The dollar is going to fall further because long-term funding for US assets has collapsed since the sub-prime crisis,” he said. Outgoing IMF chief Rodrigo Rato warned yesterday that the adjustment may be brutal. “An abrupt fall in the dollar could either be triggered by, or itself trigger, a loss of confidence in dollar assets,” he said. (Telegraph)