Thursday, September 18, 2008
Although Macro Boy the Elder is only six years old, he knows that nothing (other than certain properties of subatomic particles) moves faster than the speed of light. Nothing, that is, except financial market sentiment and pricing, which is changing at literally unbelievable speed.
News so far this morning is that the world's central banks have cobbled together a plan to provide localized overnight dollar funding. While this alleviates the worst of the near-term funding pressures, it does little to solve the more medium issues surrounding uncollateralized interbank lending.
The craziness can be observed in the price of the December 2008 eurodollar contracts, which have had a cheeky 80 bp range over the last three days. That is not a properly functioning market.
The panic is equally evident in gold, which has rallied $110 in a week. This is a market that is stocking up on shotguns, candles, and tinned beans, and is looking to place its fiat money in a hard, tangible asset. Macro Man is normally a "barbarous relic" man when it comes to gold, but given banking sector concerns he can sort of understand the appeal of gold at the moment.
Even the most sacred of cows has been taken to the abattoir. One year USD/CNY NDFs have traded as high as 7.18 (!!!!), pricing in a 4.7% depreciation in the RMB over the next year. Macro Man asked a couple of banks for some downside spreads to try and take the other side; while he received a nice price from one bank, the price from the other was literally unbelievable- he was being asked to pay out regardless of which side he traded.
European equities and short sterling have bounced strongly after CNBC aired a rumour that the BOE will cut rates today at 9.30 local time (20 minutes from when this post is being written.)
If they do, stocks will fly. If they don't, stocks should dump. In either case, prices could move at faster than the speed of light.