Ukraine invasion fallout triggers market stress alarms

Traders examine financial information on computer screens on the IG index trading floor in London, Britain February 6, 2018. REUTERS/Simon Dawson

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LONDON, March 4 (Reuters) – Financial indicators on Friday signaled growing signs of tensions in global markets as concerns grow over the wider economic fallout from Russia’s invasion of Ukraine.

With stock prices and bond yields falling, gauges seen as stress indicators are attracting investors’ attention.

The so-called FRA-OIS spread, which measures the spread between the three-month U.S. forward rate agreement and the three-month overnight indexed swap rate, hit its highest level since May 2020.

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A higher spread reflects increased interbank lending risk or banks hoarding US dollars, meaning it is widely seen as an indicator of banking sector risk.

The FRA-OIS spread increased to around 29.4 basis points on Friday from 23.7 basis points on Thursday.

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Global alarm was triggered earlier by a fire at the site of a Ukrainian nuclear power plant, the largest in Europe, after it was seized by Russian forces. The fire has been extinguished.

“Market liquidity conditions weakened this week and were exacerbated overnight after reports of bombings of Europe’s largest nuclear power plant in Ukraine,” said Francesco Pesole, currency strategist at ENG.

Nonetheless, the FRA-OIS spread remains well below the levels seen at the height of the market turmoil in 2020.

“Dollar funding conditions aren’t too alarming at the moment, but the deterioration over the past week is a natural case for a stronger dollar,” Pesole added.

The dollar index jumped almost 1%, mainly at the expense of the euro which fell 3% this week due to Europe’s exposure to the Russian economy.

The demand for dollars was reflected in the swap markets, where borrowing costs in dollars rose further. Three-month euro-dollar swaps rose to around 25 basis points from 15 basis points on Thursday.

Dollar-yen and dollar-pound swaps also tightened. , .

However, swap rates remained below the March 2020 peak of nearly 40 basis points hit on Monday, and analysts said the Federal Reserve and other major central banks had mechanisms in place to ease funding stress.

Swap and repo lines have been increasingly used since the global financial crisis, and the Fed maintains standing currency swap lines with several central banks.

“We are now in a world where emergency liquidity facilities are ready, so there is less fear of a stampede,” said Eric Theoret, global macro strategist at Manulife Investment Management.

COMPROMISE

Stress indicators are also up elsewhere.

The cost of insuring exposure to a basket of “junk-rated” European corporate debt jumped 29 basis points to its highest level since June 2020 at 388.2 basis points, according to the iTraxx European Crossover index.

Another iTraxx index that measures the cost of insuring senior bond exposure to banks and other financial issuers rose 7 basis points to 91.7 basis points, a May 2020 high.

An index of European banking stocks is down 16% this week, reeling from Western sanctions on Russia, a downgrade in interest rate hike forecasts and a deteriorating environment macroeconomic.

“There’s just a sense of elevated risk premiums across all markets,” said Helen Rodriguez, head of EMEA credit research at Mizuho.

“Inevitably there will be a lot of trade-offs between transmitting these inflationary pressures to consumers or manufacturers and it will be a very delicate balance for businesses to grapple with and inevitably it starts to crystallize in people’s minds.”

The daily number of repo failures, which occur when a market participant is unable to deliver the security in time to complete a repo transaction, was also reviewed. particular attention.

Societe Generale said daily treasury bill repo failures reached $76.1 billion on Feb. 28, the highest since June 2020 and more than double this year’s average.

Although repo failures are relatively common, large numbers of failures in volatile markets suggest upheaval and strain.

Similar concerns led the German financial agency to raise a bond to ease the shortage in overnight lending markets. Read more

The spread between interest rate swaps and German bond yields was at its widest since 2011 for 10-year debt, a sign of bond scarcity. ,

“We have all this liquidity, but it always has the ability to suddenly disappear,” said Mike Kelly, head of global multi-asset at PineBridge Investments.

“It shows how fickle things are and we’re not in normal times,” Kelly added.

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Reporting by Dhara Ranasinghe; Additional reporting by Saikat Chatterjee, Sujata Rao and Yoruk Bahceli; Editing by Sujata Rao and Alexander Smith

Our standards: The Thomson Reuters Trust Principles.

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