While outward asset markets have clearly been upended by the implications (at long last) of the Fed not doing anything, the internals of the money/”dollar” markets are actually worse. I don’t know if it could be classified as another forming “dollar” wave, but it doesn’t look good from this vantage point heading into an uncertain weekend. In many ways, the last one never truly dissolved or ended so this just may be the next phase of trying to square the global financial/economic imbalance as it takes greater proportion than thought even last month.
LIBOR rates through yesterday surged yet again, with new multi-year highs in everything. It should be noted that even the shorter maturities have gotten in on the disruption, with not just 3-month LIBOR surging but now also 1-month. That is a highly unwelcome deterioration. While bill rates had experienced similar volatility this week (as they did in the days around the PBOC’s “devaluation” due to the “dollar” run), apparent perceptions of interbank credit risk are not satisfied despite last month’s actions (which is not unexpected, as volatility begets more and thus self-reinforcing toward that ultimate spiral).
Similarly and relatedly, eurodollars were strongly bid everywhere in the day and almost half since the FOMC confirmed the more wretched nature of the global economy (and US with it, though they are stubbornly loathe to openly confirm that obvious implication). Even the front month of October 2015 sustained a truly intense buying wave. The entire eurodollar curve out to 2019 is now flatter (bearish) than it was on August 24!
Unsurprisingly, given that “dollar” background, the bid for safety was also intense. Both gold and the yen were bought heavily these past two session which, combined with interbank turmoil, is not an optimistic take on where markets might head into Monday (liquidations in commodities today, even as they had been more buoyant since August).
The junk bubble had even started pricing lower before the FOMC, with the S&P/LSTA Leveraged Loan 100 dropping once again below 950 (market value subcomponent).
I wrote on Monday that the unsatisfied nature of the “dollar” this month and all its related markets were seemingly awaiting some “spark” to renew the deterioration. The implication was that the FOMC would provide it in either direction; it appears they may have indeed.
As mentioned last week, the primary problem here is time. August 24 was three weeks ago and it is increasingly clear that nothing was settled by the liquidations and disruptions. That possibility threatens to turn what might have been temporary adjustments in not just risky positions themselves but open and easily offered leverage into a more permanent and structural shift.
Obviously, that has been the case going back to last year’s “dollar” turn and even to the high point in the junk credit cycle in May 2013. But as each of these individual “events” fail to find a durable point of stability (like even a potential bottom) and the downside momentum only accelerates with each, the risk systemically becomes more about the size of the exits than whether they would actually become necessary.
Since yesterday, appreciably narrower.