Oil has hit $US90 a barrel in after-hours trading in Asia this morning, the first time it has reached that level. A falling US dollar was the driver: the greenback rose above 1.43 to the Euro, a record low.
The move also came as speculation rose in US markets that the Fed will again cut interest rates at the end of the month because of the growing impact of the housing recession and renewed concerns that the subprime crisis hasn’t gone away.
November crude reached $US90.02 a barrel in after-hours electronic trading on the New York Mercantile Exchange before easing to be around $US89.61 later in the morning. The November contract jumped $US2.07 to close at $US89.47 in regular trading overnight, its highest ever close.
At the same time US investors continued to shift to the safety of US Government debt. The main 10-year bond finished lower in yield at 4.59% from 4.55% on Wednesday. That’s a fall of 0.16% in two days.
The yield on the three month Treasury note was sliced to close at 3.80% from 4.07% on Wednesday (it touched 3.99% that day). That’s a fall of 0.44%, which is large by any measure and a sign of the growing concern about the short term outlook.
Not helping was the 32% drop in third quarter earnings from Bank America, the country’s second biggest bank, thanks to big losses on subprime mortgages, associated securities and other leveraged investments.
Investors were surprised by the sharper than forecast fall in earnings and $US4 billion in trading losses, defaults and write-downs at the bank. That’s about what UBS lost and compared to the $US5.9 billion in losses at Citigroup.
Nervousness about the credit freeze returning was emphasised by the 11th straight weekly fall in the US the size of the US asset backed commercial paper market, which is short term funding of things like structured investment vehicles, conduits and other off balance sheet structures used by banks, hedge finds and other investors to leverage up returns from buying bonds, credit derivatives and other speculative securities.
Two so-called SIVs, containing around $US30 billion in commercial paper, have indicated in the past two days, they cannot pay their way any more, even though they have cash reserves.
From reports in London and Germany, the pleas are part of negotiating tactics to get a restructuring of their debts agreed to be creditors (ie. agree or we will be forced to liquidate or go into court administrated protection and you will get a smaller amount back).
The biggest, Rhinebridge, a near-$US2 billion SIV run by the rescued German bank IKB, said on Thursday it had breached triggers that mean it is almost certain to be forced to start selling assets to pay back creditors. It contains $US23 billion in commercial paper.
The other vehicle is the $US6.6 billion SIV run by London’s Cheyne Capital. Cheyne Finance is the name of the SIV and its administrator won court backing in London to declare it in breach of insolvency tests.
Rhinebridge was set up by IKB in June to sell short-term commercial paper to invest in securities with longer maturities and higher yields, including mortgage-backed debt.
IKB was bailed out this year by a group led by German state-owned KfW Group (which owned 38%) because of potential losses related to subprime loans. It was one of two German banks to be bailed out because of exposure to subprime loans in the US.
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