Is the credit crisis over yet?

Investment bank UBS yesterday revealed its first quarterly loss in nine years as it was forced to write down the value of its mortgage-backed securities by about £1.8bn. The pre-tax loss for its third quarter is expected to amount to around £840m. The group will also slash 1,500 of its 22,000 investment banking jobs, many of which are likely to come from London.

Meanwhile, Citigroup said it expects its third-quarter profits for the three months to the end of July to be down 60% on the second quarter. As James Quinn reports in The Telegraph, the losses are coming from four main areas: “leveraged loans; complex credit products; credit trading; and its global consumer business.” All are broadly related to the sub-prime crunch – the bank has been left holding loans for buyouts on its balance sheet, after failing to sell them into debt markets, which froze up after the sub-prime crisis started to unravel. It also has exposure to sub-prime mortgage-backed securities, while its credit trading desk lost money amid all the upheaval.

But, “most interesting”, as Quinn puts it, is the losses on Citigroup’s consumer business. “For the third quarter, consumer credit costs are expected to rise by $2.6bn, one quarter of which stems from higher losses, and the other three quarters from higher charges to increase loss reserves.”

In other words, the bank’s having to put a lot more aside to cover bad debts. “This is a clear sign that Citi – and it will not be alone – is starting to feel the pinch from delinquencies in the mortgage market,” which is only set to get worse as more borrowers default on their home loans.

So, despite the obvious relief of the markets, there may well be more pain to come. As Damian Reece says in The Telegraph, “UBS may be axing 1,500 staff, but you can add another nought to that for the number of jobs at risk at Northern Rock, a bank in the utmost peril.”

Meanwhile, the news on the home economic front isn’t looking promising. Factory-gate inflation shot up last month. The Chartered Institute of Purchasing & Supply reported that in September, the price of manufactured goods rose at its fastest rate since CIPS records began in 1999, fuelled by soaring raw materials prices.

That’s likely to keep the Bank of England lairy of cutting interest rates when it meets later this week. But as inflation was picking up, so there were finally genuine signs that the housing market is running headlong into economic reality.

The number of new mortgages approved last month fell to its lowest level since April, while net lending, at £8.46bn, was the lowest since February 2006. Hometrack warned that house prices in England and Wales were static in September, for the second month in a row. On top of this, mortgage equity withdrawal, which has been helping to fuel consumer spending, fell sharply in the second quarter, from £13.1bn to £10bn.

Is the worst over? Far from it – the US consumer is in dire straits, while the consumer slowdown on this side of the Atlantic is only just beginning. We think there’s a good few nasty surprises still waiting out there.

Turning to the wider markets…

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In London, the FTSE 100 was boosted by a late rally on Wall Street plus good gains for miners. The blue-chip index was up 39 points, at 6,506, with Tate & Lyle topping the FTSE leaderboard on hopes that a recent slump could prompt a takeover bid. For a full market report, see: London market close 

Elsewhere in Europe, the Paris CAC-40 was up 57 points, at 5,773, and the Frankfurt DAX-30 added 60 points to end the day at 7,922.

Across the Atlantic, US stocks began the fourth quarter in fine form, crossing the 14,000 mark for the first time since July to end the day at a new record high of 14,087, a 191-point gain. The tech-rich Nasdaq was up 39 points, at 2,741. And the S&P  500 added 20 points to end the day at 1,547.

In Asia, the Hong Kong Hang Seng soared as high as 28,256 today – a new record – thanks to strength on Wall Street. In Japan, the Nikkei closed up 200 points, at 17,046.

Crude oil had fallen back to $79.90 this morning and Brent spot was at $77.70 in London.

Gold fell over 1% – from $736.25 to $746.80  – yesterday as investors took profits on the previous day’s rally. And silver climbed as high as $13.7 today before falling back to as low as $13.37.

In the currency markets, the pound was at 2.0386 against the dollar and 1.4358 against the euro. And the dollar was at 0.7041 against the euro and 115.59 against the Japanese yen.

And in London this morning, supermarket giant Tesco announced a 19% increase in first-half profits on increased revenue from non-food items in the Eastern European and Malaysian markets. Price cuts also helped to offset the effects of wet weather in the UK. Tesco shares had risen by as much as 3.3% in early trade.

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