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Light at tunnel’s end or mirage, markets wonder

Global stocks hit an all-time high as subprime losses spelled out by big banks calmed fears that the liquidity crunch would derail the global economy.

On Monday, UBS unveiled $3.4 billion in losses, mainly on securities tied to the US subprime mortgage sector, Credit Suisse said it would be ‘adversely impacted’ by the market turmoil and Citigroup said it would post a decline of about 60 percent in third-quarter net income.

Other major US finance houses have suffered in similar fashion and Deutsche Bank, Germany’s largest, has warned it will suffer a hit in the third quarter although it has not yet quantified the scale of the likely damage.

Undeterred, the Dow Jones industrial average soared to a record high on Monday.

European shares followed suit—by 1000 GMT, the FTSEurofirst 300 index of top European shares was up 0.55 percent at 1,571.81 -- and MSCI’s All-Country World Index posted an all-time high.

Analysts remained cautious, however.

‘I think it’s a bit too quick to say it’s done now,’ said Heinz-Gerd Sonnenschein, a strategist at Germany’s Postbank.

‘We’ve seen huge (losses) at UBS, at Citigroup ... we can say next quarter will be better and the whole year will be okay, but I think these will not be the last companies we will see with problems coming out around subprime,’ he said.

Despite the continuing turbulence stemming from US home loans mainly to people ill-equipped to pay, which were packaged into securities and parcelled out to investors around the globe, former Federal Reserve chief Alan Greenspan detected a glimmer of hope.

In a speech at the Reuters headquarters in London on Monday, Greenspan noted that US high-yield bond issuance had started to take off again. ‘Is this August/September credit crisis about to be over? Possibly,’ he said.

Credit market calmer?

There were tentative signs, too, of a calming of credit markets.

The iTraxx Crossover index, the most widely watched indicator for European credit market sentiment, tightened 9 basis points.

Australia’s central bank provided no funds to the banking system on Tuesday, effectively draining more surplus cash as interbank rates looked to have stabilised for the moment.

But the Euribor 3-month interbank lending rate fixed at 4.795 pct, its highest since May 2001, and banks also bid heavily for money at the ECB’s weekly liquidity tender.

Central banks worldwide pumped cash into the system in August and September to help ease a liquidity squeeze as lending among banks seized up while they tried to work out the extent of their exposure to US subprime mortgages.

The next pointer will come when the Bank of England, initially one of the central banks most reluctant to act, offers 10.0 billion pounds in its 3-month cash auction, the second of four operations designed to ease money market tensions.

There was still evidence of the havoc that has been caused in the financial sector.

Shares in battered Northern Rock fell more than 15 percent on Tuesday to touch an historic low of 112 pence as bids for the British lender failed to materialise, but then bounced back.

Last month, thousands of panicked savers queued to get their money out of Britain’s fifth-biggest mortgage lender, after it had to seek emergency funding from the Bank of England.

Japan’s financial regulator is investigating the exposure of the country’s financial firms to the US mortgage market to gauge the risks facing the world’s second-largest economy despite little evidence of damage so far.

‘If we do find any problem, we plan to deal with it quickly,’ Financial Services Minister Yoshimi Watanabe told a news conference.