Icap’s Chris Clark alerts us on Friday to the fact that European liquidity markets are already preparing themselves for a potential liquidity squeeze come the end of the year.
As he notes:
Month-ends have become increasingly significant events for the Eurozone repo markets over the second half of this year as levels of excess liquidity have diminished and market rates have slowly edged higher. This Thanksgivings Day/November month-end liquidity hump has proved a tricky one for the market to manoeuvre, but already attention is focusing on the impending year-end as evidence stacks up to suggest funding might be problematic for some.
A while ago we speculated that because of the ongoing bifurcation of the eurozone market, Eonia rates could rise, and liquidity once again concentrate in core economies, as banks pay back their LTRO funds.
Even if it appeared that the system could handle the repayments, banks in core economies would still be inclined to take advantage of extremely cheap negative rates available in collateral markets, so as to earn a spread on the deposit facility in a way that arguably encumbered the remaining liquidity. That would make it less available to periphery institutions.
Meanwhile, without the additional layer of ECB liquidity in the system — which acts as a type of system-wide insurance mechanism — periphery banks would consequently be forced to make ever more competitive bids for Eonia funds, lifting rates across the board. Read more
From Morgan Stanley’s combined banks/economics/credit/rates research team on Tuesday:
Eurozone M3 data are out…
That’s the annual growth rate of the euro-zone broad money supply (M3) falling from 3.1 per cent to a well below expectations 2.6 per cent in March and allowing a quick segue into a good news/ bad news post ahead of next week’s ECB meeting and increasingly probable cut. Read more
First some charts from Barclays:
Take one big pool of eurozone liquidity, insert straws and start sucking.
We’ve already opined on the chances that early-LTRO repayment will lead to a drain on excess-liquidty in the euro-area. But we argued that since it is unlikely to take more than about €200bn out of circulation, with consensus expecting about €130bn to be sent back, the effects should be muted.
But what if another straw is soon to be inserted? Read more
If you have euros and want to borrow dollars against them… at the moment, it’s going to cost you.
But… if you happen to have dollars and want to borrow euros against them… you will be paid to do the deal instead. Read more
In my remarks today, I would like to share with you some concerns about the present state of the euro area money markets, which are characterised by segmentation between cash-rich and cash-poor banks and a fragmentation along national lines. I would also like to offer some thoughts on how proper money market functioning can be restored.
So starts a recent speech by Benoît Cœuré, member of the Executive Board of the ECB, which should be required reading for everyone interested in the fragmentation of the European money markets. Read more
Where “good” = yield from a nice Eonia trade.
Quite frankly, this looks to us like picking up pennies in front of a steamroller. Read more
Meanwhile in Europe … Money markets are also moving.
Recent bidding patterns at the European Central Bank’s seven-day funding operation below: Read more
Kathleen Brooks, FX research director at Forex.com, has spotted something of curiosity regarding the euro.
It seems to have detached itself from interest rates and its own fundamentals. Read more
Even with Ireland’s Fine Gael party leading in the polls — the market is pricing in a one in three chance of senior bank debt investors taking a haircut.
Why? Read more
Fresh from the European Central Bank on Friday morning, some clues to the mystery of Thursday’s €15.8bn ‘fat finger’ tapping of eurozone liquidity.
Headlines off of Bloomberg: Read more
Eonia went a bit doolally at the end of January.
Many blamed a lack of front-loading in bank liquidity management as they watched Europe’s key overnight lending rate drift above one per cent for the first time since June 2009. Read more
Europe’s banking system is returning to health amid signs that financial institutions are no longer hoarding cash, according to overnight lending rates, says the FT. Eonia rates have jumped above official ECB interest rates of 1 per cent for the first time since June 2009, while money held at the central bank above reserve requirements fell to €7bn ($9.5bn) last week from €350bn at its peak last June. In the equity markets, European bank and insurance stocks are set for their best January since at least 1998 as concerns diminish for now, Bloomberg reports.
***WARNING*** Interbank rate geekiness ahead! ***WARNING***
According to Bloomberg data, there’s been an interesting development in the euro swaps curve over the last week.
As can be seen below, the very front end of the curve has inverted ever so slightly: Read more
Thursday’s European liquidity update is brought to you by the European Central Bank’s special six-day fine-tuning refinancing operation.
The op’s taking place, as we’ve noted before, to coincide with about €225bn worth of maturing Long-Term Refinancing Operations (LTROs). Read more
Wednesday is Long-Term Refinancing Operation roll day — the most significant European funding rollover since the expiry of the €442bn 12-month LTRO back in June.
About €225bn worth of European Central Bank liquidity largess will be maturing on September 30, as three operations come to an end (a €132bn three-month, €18bn six-month and €75bn one-year). Banks will get a chance to roll into new operations this Wednesday, specifically a new three-month LTRO. Thursday will also see the start of a six-day fine-tuning operation. Read more
Did you notice the, erm, fireworks in the September Schatz last week?
Short-term liquidity rates — like European top-tier commercial paper — quite literally jumped off a stress-test cliff last week, reports FT Alphaville. Which is rather a step-change given that for the first few days after test results were announced some European interbank strains looked to have persisted. Three-month Euribor, for instance, continued its steady ascent upwards for most of last week. It finally dropped to 0.896 on Friday — its first decline since April 30, according to Bloomberg. Read more
FT Alphaville noted on Wednesday how the basis between the Euribor rate (set by a panel of 42 European participating banks) and Euro Libor (as set by 16 banks in London) has been diverging on the back of the European sovereign crisis.
Of course, there was one other divergence that appeared in the European funding market post the Lehman crisis. The difference between Euribor (a survey of unsecured term lending) and Eonia (unsecured overnight lending rates). Read more
This is the divergence that’s taken place between three-month Euro Libor (as set by 16 banks in London) and Euribor (as set by 42 banks in Europe) since about June 2009:
Front-loading time is upon us.
For today is the start of the European Central Bank’s new maintenance period. Read more
Eurozone market interest rates headed higher on Tuesday, in effect tightening monetary policy in the 16-country bloc, as ECB operations drain excess liquidity from the financial system, the FT reports. The rise in borrowing costs highlighted the balancing act faced by the ECB, which holds an interest-rate setting meeting in Frankfurt on Wednesday. FT Alphaville reported on Monday that the bank’s recent liquidity draining was the equivalent of two small policy rate hikes in “normal” times, according to Citi analysts.
The European Central Bank’s 12-month LTRO expired with a whimper, last week.
Lower-than-expected roll-over demand for the central bank’s new, albeit shorter-maturity, facilities meant European banks weren’t doing as badly as feared — or, at least some of them weren’t. But the reduction in ECB liquidity could mean something else for money markets; higher rates. Read more
Results of the European Central Bank’s six-day fine-tuning operation are out.
And they are — €111.2bn allocated to 78 banks. Read more
Relieved at the results of Wednesday’s three-month European Central Bank offer? Not so fast. FT Alphaville observes that Europe’s banks are tapping ECB liquidity less overall — but this may be obscuring discrepancies between banks, creating a two-tiered system: those that can survive higher interbank rates in the future, and those that still have to cling to the ECB’s petticoats. Read more
So — the ECB’s 3-month liquidity operation saw less demand than expected on Wednesday. Approximately €132bn versus consensus expectations of some €250bn, to be exact, which left markets and the euro to rally after the announcement.
Nevertheless, as Unicredit’s Luca Cazzulani warned in his LTRO guide, there are some risks associated with too little demand for the facility — specifically demand below the €140bn mark, as has transpired. Read more