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Abu Dhabi: Last week proved to be a busy one in the credit markets, with headlines dominated by US government intervention and a succession of bank earnings results.
Markets were initially comforted by US government support for the two largest mortgage finance companies, commonly known as Freddie Mac and Fannie Mae.
In an effort to stave off bankruptcies that could severely weaken the US financial system, Treasury Secretary Henry Paulson proposed that the Treasury be given authority to buy equity in the two firms as needed.
An initial rally proved short-lived though, as concerns resurfaced over the impact of such investments on the US government balance sheet.
Financial stocks continued to slide and touched their lowest point in a decade on Tuesday. Markets swiftly turned around though, first on an announcement that the SEC was to ban short-selling in a number of stocks, and second on better-than-expected earnings from JP Morgan and Citibank.
This brought a round of short-covering and a sustained rally in international markets that lasted through to the end of the week.
In line with volatility elsewhere, GCC credit markets posted 5-15 bps widening across the different sectors before recovering most of the losses.
The HSBC/DIFX Sukuk Index ended the week relatively flat, after posting another all time wide at 273.6 bps intra-week.
This is over 200 bps wider than the record 12 month low of 64.5 bps posted this week last year, a few days prior to the start of the credit crunch blowout.
Islamic banks reported healthy gains in earnings ranging from 53 per cent second quarter gain by Abu Dhabi Islamic Bank to Dh276 million to a more than three-fold increase in first half earnings reported by Emirates Islamic Bank to Dh320 million.
ADCB and a handful of Saudi conventional banks also reported advances in half year earnings when compared to last year.
Activity in the local currency market was once again revived this week as a member of the Saudi Shura Council proposed a 20 per cent revaluation in the riyal peg to the dollar.
This triggered a significant move in the foreign exchange markets and a reaction in dirham-denominated credits on the back of revaluation speculation.
Although the speculation was short-lived, week on week the dirham-denominated credits closed 10 bps tighter.
HSBC Dubai Fixed Income Trading
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