Sub-prime meltdown worsens: Economy roundup

Global investment bank UBS Warburg has joined the ranks of banks burnt by the sub-prime crisis, last night announcing that it will write-off $US10 billion in sub-prime driven losses.

Investors in Singapore and the Middle East will ensure the liquidity of UBS with a $US11 billion injection of capital, a move that echoes those made by Middle East investors in relation to fellow banking giant Citigroup last month.

The worsening environment on financial markets is beginning to hit hard in Australia. Yesterday two giant deals fell over – the $3 billion purchase of farm chemical company NuFarm by Chinese interests and an $8 billion purchase of Alinta Gas assets by Singapore-backed SP Ausnet – because of increased risk aversion and borrowing costs.

And worries about the impact of the sub-prime crisis is also being felt by Australian businesses, with the NAB Business Survey for November recording the lowest levels of business confidence this year – as did the latest Dun & Bradstreet survey.

Although GDP growth forecasts for 2008 remain strong at 3.25%, business conditions and confidence both fell in November thanks to a combination of financial market volatility and the likelihood of further interest rate hikes on the horizon.

Business costs also remain high, with wages growing 1.4% for the month and a high 5.4% for the year.

Despite the bad sub-prime and business confidence news, however, Australian markets are up this morning – primarily because the bad news from the US means the US Federal Reserve is more likely to cut interest rates when it meets today.

At 12.45pm, the S&P/ASX200 is up 0.6% on yesterday’s close to 6667.8 and the Australian dollar is trading at US88.73c, up from US87.69c close.