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Just when everyone hopes there aren't any more skeletons in the closet, subprime pops back up.
Swiss investment bank UBS yesterday wrote down another £5bn or so of US subprime holdings, on top of £2bn written down in October. The group will now make a loss in the fourth quarter, and potentially also for the full year.
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It will shore up its finances by selling a 9% stake to the Government of Singapore Investment Corporation and 2% to an unidentified Middle Eastern investor, for a total of £5.6bn.
It's a good thing for wobbly western banks that foreign investors have so much money. And as the economic outlook darkens, there'll be plenty more opportunities for them to spend it
The US is heading for recession
A US recession is now seen as likely by Morgan Stanley. The normally bullish Dick Berner reckons that US growth will shrink by 1% a quarter for the first nine months of 2008, as a combination of housing market woes, the rising cost of credit, and weakening employment data result in the "perfect storm" for consumers.
British engineer FKI backed up the concern as its shares tumbled 17%, after it warned its sales would be hurt by exposure to US retail. Its parcel delivery, warehousing and baggage handling division, FKI Logistex, has seen sales slump on last year, as US clients delay orders amid fears of a spending slowdown.
In truth, the state of the US housing market is so bad, that the only real surprise is that anyone could have ever imagined that the economy (of which 70% is built on consumption) could somehow scrape through the collapse relatively unscathed.
but what about Britain?
The big question is what's going to happen on this side of the Atlantic? Despite the Bank of England's loss of control of inter-bank lending rates (see Friday's Money Morning for more: Rate cuts haven't stopped the US housing crash), many people are still pinning their hopes on more cuts to see us through.
But even if more cuts would help, the Bank is in a very tight spot. Inflation remains worryingly stubborn, particularly at the raw materials end. Factory input prices rose by 10.1% year-on-year in November. That was driven by a 18.5% rise in petrol products, a 6.6% rise in bread and pastry products (the highest since July 1993), and a 7.5% rise in the cost of cereals.
Moreover, manufacturers seem quite happy to pass the costs onto retailers. Producer prices rose at an annual rate of 4.5%, the highest in 16 years.
The assumption is that retailers will not pass on the costs to consumers, as they need to attract customers in the run-up to Christmas. But this ignores which products are actually rising in price. These aren't luxury items we're talking about here this is food. And shops are already jacking up food prices in response. British Retail Consortium figures for November showed prices rising by 4.3% on an annual basis, driven mainly by food price inflation.
Now the price of other goods certainly in the run-up to Christmas may not see a marked rise. Fear of a consumer slowdown in January, and increased competition for a smaller market may also keep a lid on prices of non-essentials. But you can bet that consumers will be feeling the pinch from higher petrol costs, bread and milk costs, and despite the base rate cuts mortgage costs, throughout 2008.
Our economy is also built on consumer spending about the same 70% as in the US. With our own housing market starting to topple, it looks like the US is providing something of a grim road map for Britain to follow. As regular MoneyWeek columnist Tim Price says in the latest edition of his Price Report investment email, "a UK recession in 2008 looks like a done deal".
More bad news for commercial property
Oh, and just to follow up on commercial property (see yesterday's Money Morning - The crisis in the other property market), New Star reported yesterday afternoon that its property fund has shed another 8.2% of its value. It has now lost 17.9% of its value since July. Remember that 10% is a correction, and 20% is a crash.
Wounded property fund managers may like to point the finger at media-scaremongering and proclaim that commercial property is a long-term investment but as Paul Farrow pointed out in The Sunday Telegraph, the thing that's really going to scare investors is when their statements hit the mat and show that the value of their property Isa has plunged in the past year.
We'll see just how many investors were looking at the long term when they bought commercial property funds on the back of the heavily-advertised 18% annual increases in the sector since 2003.
Turning to the wider markets...
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In London, the FTSE 100 closed up 10 points at 6,565. Bank Lloyds TSB headed higher after reporting a "relatively limited" impact from the subprime fall-out. For a full market report, see: London market close
Elsewhere in Europe, the Paris CAC-40 added 32 points to end the day at 5,750. And in Frankfurt, the DAX-30 was up 39 points to close at 8,033.
Across the Atlantic, US stocks made gains, ahead of the Federal Reserve's decision on interest rates this evening. The Dow Jones ended 101 points higher at 13,727. The tech-rich Nasdaq climbed 12 points, to close at 2,718. And the broader S&P 500 gained 11 points to end the day at 1,515.
Crude oil futures had risen to $88.44 this morning, and Brent spot was at $88.09 in London.
Spot gold was trading at $808.00 this morning, while silver was trading at around $14.67.
Turning to the forex markets, the pound was at 2.0478 against the dollar and 1.3909 against the euro. And the dollar was at 0.6794 against the euro and 111.92 against the Japanese yen.
And this morning, Rio Tinto has issued a "put up or shut up" challenge to BHP Billiton, asking its rival to make a formal bid or walk away from its proposed merger deal.
Finally, our recommended articles for today...
How banks got trapped in a vicious cycle
- November was an ugly month for markets, but the future may be a little brighter, says Niels C. Jensen. To find out why markets are behaving the way they do - and what we can expect in 2008 - read: How banks got trapped in a vicious cycle
Be a clever giver
- Christmas is supposed to be the season of giving, but when it comes to actually doing so most of us are horribly confused, writes Merryn Somerset Webb - read: Be a clever giver
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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