Three Developments Shaping Month-End

Today may be the last day of full liquidity until next Tuesday, after the
Easter holidays.
  We identify three developments that are
characterizing the end of the month, quarter, and for some countries and
companies, the fiscal year.  Equity market sell-off, bond market rally,
and the continued rise in LIBOR.  

The sell-off in stocks at the end of last week amid what we think was
exaggerated fears of a trade was subsided and stocks rallied on Monday, but US
stocks slumped yesterday, which is dragging global markets lower today.
 
Last year’s low volatility seems a distant memory.  Since last month’s
swoon, the VIX has mostly held above 15 and below 25.  It is near 23 now,
which is a little more than twice last year’s average.  

Technology shares, which had led the global rally are in retreat. 
Privacy issues and problems with self-driving cars may be the proximate
triggers. The information technology sector in the US lost nearly 3.5%
yesterday, twice the loss of the S&P 500.  The MSCI Asia Pacific Index
slumped 1.35%, giving back most of the gains of the past two sessions. 
Information technology and telecoms appeared to be a major weight.  It is
a similar story in Europe.  The Dow Jones Stoxx 600 is off about 1.25% in
late morning turnover, while information technology is off 2.7%.  

In Japan and Europe, the only sector that is higher on the day are
utilities, and that seems to be a function of lower bond yields. 
That
is the second development characterizing the capital markets.  The US 10-year
yield fell through the recent floor around 2.80% yesterday and is now slipping
below 2.75%.  It is the lowest yield since February 6, when it briefly
spiked to 2.65% amid the equity market meltdown.  Australian and New
Zealand’s 10-year benchmark yields fell 6-7 bp, while the UK Gilt yield is five
basis points lower at 1.37%, which is the lowest since January 24.  Core
yields in Europe are lower, while peripheral yields are a little firmer. 
The 10-year German bund yield is slipping below 50 bp for the first time since
January 9.   

The third characteristic of the capital market is the continued
relentless increase in dollar LIBOR.
  It appears to have fallen in
only five sessions here in Q1 18 and ICE three-month LIBOR has not fallen in
over a month.  Some argue that with US T-bill sales set to slow after the
recent deluge, that some pressure may be relieved.  Alternatively, if the
pressure is also emanating from tax laws that encourage US companies to
repatriate (bringing mostly offshore dollars onshore) and the disincentives
from lending between parent and subs (for both domestic and foreign-based
companies) then the pressure may persist.  

At the same time, the dislocation is seeing dramatic but opposite
adjustment in the cross-currency basis swaps market. 
On three-month
tenors the premium for dollars against the yen, which reached more than 100 bp
on top of LIBOR at the end of 2017, briefly traded at a discount yesterday for
the first time since early 2012.  It is back to a premium today (~16 bp+ LIBOR). 
Cross-currency basis swaps for dollars against sterling reached 80 bp on top of
LIBOR in the middle of last December.  The premium for dollars switched to
a discount last week and that discount is now near 17 bp.  A discount for
dollars has barely existed since 2008.  The premium for dollars over euros
approached zero yesterday for the first time in nearly four years and now is a
little more than six basis points on top of LIBOR.  

This conflicting forces, higher USD LIBOR, and lower dollar premium or
even a discount in the cross-currency swaps market has far-reaching
implications even if the causes may not be fully understood.
  It
raises the cost of hedging, which means it reduces the attractiveness of buying
US fixed income–Treasuries as well as corporate bonds–, though this week’s US
have gone relatively smoothly.   The auctions continue today with $15
bln two-year floater and $29 bln seven-year notes.  

The US dollar is mostly firmer today.  Sterling is the main
exception as it edges higher, though well within yesterday’s broad range. 
If the consolidative tone persists, sterling may hold below $1.4200. 
Initial support is seen near $1.4140.  The euro is also experiencing an
inside day, but seems pinned near yesterday’s lows near $1.2375.  The
week’s low was set on Monday near $1.2335.  The dollar has also been
confined to yesterday’s range against the yen.  It finished last week
below JPY105 and dipped a bit lower at the start of this week, but has remained
above that support since Monday’s recovery.  

The dollar-bloc currencies are softer.  The Australian dollar is
slipping lower and near $0.7655, it has made new lows for the year.  Some
observers are linking the pressure on the Aussie to the LIBOR pressure. 
The US dollar bounced higher after approaching support near CAD1.28
yesterday.  It is now near CAD1.29.  We peg resistance in front of
CAD1.2930, and a break could see a quick test on CAD1.30. 

US data today includes another revision of Q4 17 GDP.  A
somewhat stronger inventory build is expected to lift the annualized pace of
growth to 2.7% from 2.5%.  February advanced goods trade balance and
retail/wholesale inventories will be used to estimate Q1 18 GDP, but are
unlikely to alter ideas that the curse of a weak Q1 GDP (since the Great
Financial Crisis) may were evident this year too despite the tax cuts and
spending increases. 

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