Date: September 17, 2019
Overnight Funding Rate Surges to Record Levels Above 8%
“U.S. money-market interest rates surged for a second day Tuesday as cash reserves in the banking system remained out of balance with the volume of securities on dealer balance sheets. Amid the squeeze, the effective fed funds rate rose to 2.25%, in line with the top of the Federal Reserve’s target range of 2% to 2.25%. The rate on overnight general collateral repurchase agreements soared by more than 600 basis points to 8.75%, based on ICAP pricing, before settling back around 7.25%. Surges are commonplace only around quarter- and month-end, so market participants had expected things might return to normal. “This is certainly painful for firms that have to fund positions,” said Thomas Simons, an economist at Jefferies LLC. “So it’s difficult for the dealer community. But it’s not systemically threatening.” On Monday, the rate on overnight GC repo soared by as much as 248 basis points to 4.75%, the highest level since December, according to ICAP pricing, amid the settlement of Treasury coupon auctions and the influx of corporate quarterly tax payments, possibly aggravated by last week’s bond-market selloff, in which investors sold securities back to dealers. Separately, the Secured Overnight Financing Rate, which is backed by overnight GC repo transactions, rose to 2.43% Monday from 2.20%, New York Fed data show. That’s the highest since July 31.”
ECB’s Villeroy Says Oil Price Spike Will Hurt If It Lasts
“The jump in oil prices following the attack on Saudi Aramco’s giant Abqaiq plant risks raising inflation and damping growth, Bank of France Governor Francois Villeroy de Galhau said. In a wide ranging speech in London that considered the risks presented by digital coins, climate change and Brexit, he said the world economy faces unsustainable levels of uncertainty, and that the loss of confidence needs to be addressed by politicians, not central bankers. The strike on Saudi Arabia, which knocked out roughly 5% of global oil supply, is just the latest example, he said. “It is too early to rush to hasty conclusions; we should closely monitor the consequences on the oil market, which is characterized by a rather flexible supply and a subdued demand,” Villeroy said. “If it lasts, this latest oil shock could increase inflation and hamper growth.” He also identified climate change as potentially creating upward price pressures and a slowdown in activity which risks generating a “long-term stagflationary shock.” Central banks need to research the economic effects and integrate them into their macroeconomic models and look at the credit risk.”
China Stocks Fall, Yuan Weakens as Central Bank Holds Loan Rate
“China’s restrained approach to easing spooked financial markets Tuesday, with stocks and the yuan dropping the most in weeks. The Shanghai Composite Index retreated 1.7%, its biggest decline in more than two months, to close below the psychologically important 3,000 level. The onshore yuan fell 0.37%, the most in three weeks, to 7.0950 a dollar as of 5:23 p.m. in Shanghai. The yield on China’s 10-year government bonds rose for a sixth day. In Hong Kong, the Hang Seng Index lost 1.2%. China’s central bank drained funds from the financial system and kept the one-year rate on medium-term loans steady on Tuesday morning, a move analysts said shows it’s sticking with its prudent approach to stimulus. That’s even after data Monday signaled the economy slowed in August, with industrial output, retail sales and fixed-asset investment rising less than anticipated. “Investors now realize the central bank won’t ease its monetary policy as aggressively,” Zhang Gang, a strategist with Central China Securities Co. “The market was due for a pullback after the Shanghai index climbed above 3,000 point level. Turnover failed to keep up.” ”
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