Last week saw a slight easing in global money markets; the largest borrowing from the Fed’s discount window since September 2001; and the emergency bail-out of the largest mortgage lender in the UK. The extreme dislocations in USD, EUR and GBP money markets eased slightly last week, with most short-dated rates rallying and overnight LIBOR actually falling below the effective Fed Funds rate. Further out, 3-month LIBOR rates fell around 8bps over the week. Even the Asset-Backed Commercial Paper spreads edged down a touch. During the week, banks borrowed $7.2bn from the Fed’s discount window, the most since the immediate aftermath of September 11, 2001. On Friday, the Bank of England (until now the “toughest” of the major central banks in its response to money market dislocations) announced it had provided Lender of Last Resort facilities to Northern Rock, secured on its own mortgage book. Despite the draw-downs on the US discount window and some dramatic stories of UK depositors queuing outside branches to withdraw money, the overall mood in global money markets seems to be slightly better now than a week ago.
In Asia, some key rates have continued higher despite the global normalization. In China, 1-month SHIBOR rates climbed another 117bps (and are now up 165bps since end July), 7-day repo rates continued their dramatic spike higher, rising to 21.5% from 11% last Friday and a low of 1.4% on August 20. Unquoted onshore inter-bank rates also increased (albeit far less dramatically), jumping higher a few hours before China announced yet another modest 27bp rate hike (which brought the deposit rate to 3.87% and the lending rate to 7.29%). As we noted last week, Chinese rates are highly immune from global fluctuations – actually falling during the worst of the turbulence in the US and now rising even as things seem to be improving a touch globally. Chinese money markets are protected by capital controls, and have been partly driven by the authorities’ efforts to reign in domestic liquidity (via special T-bill issuance; the September 6 increase in required reserves by another 50bp to 12.5%, and last Friday’s rate hike). A number of important pending IPOs have added to the tightness by taking money out of the banking system, and this impact should fade. In Hong Kong, overnight HIBOR is now 80bps higher than on Tuesday, and 55bps higher than last week, while 3-month yields have edged down in line with global markets. Singapore rates were better behaved, with 3-month SIBOR edging down around 6bps more in line with global conditions.
Despite the PBOC rate hike, Chinese and HK equities outperformed the region, yet implied vols remain high. Chinese and Hong Kong equities rose by 3% and 6% respectively last week, clearly outperforming the 1.8% rise in the regional index MXAPJ, confirming that while the exact timing of hikes is a bit of a lottery, the move was much as expected. Since the recent trough, regional equities have bounced more impressively than their global peers (the regional index is now only 4.5% below its peak after being down 19% at one point). However, implied volatility remains higher in Asia than in the majors (implied vols in AEJ are mostly in the high 20s-low 30s, while the implied vols on the majors in generally in the low 20s). This higher implied vol seems more a direct result of the actual volatility rather than a measure of real fear, as Asian equity markets show less skew than the majors (investors don’t seem to be as one-sided in their desire to get protection from price falls).
