There's scary things in the overnight lending district

US markets tried to erase Friday’s near 400 point loss on Monday with an 80% retracement to the upside, yet there was little follow through in Asia or Europe on Tuesday.

This tells me that while the Federal Reserve came out yesterday with yet another contrarian voice — a dovish Fed Governor Lael Brainard countered historically dovish Boston Fed President Eric Rosengren’s hawkish tilt on Friday — there’s just no leadership at the Fed to steady the ship.

Let’s look at the Dow, down 390 points on Friday, up 240 on Monday and down 110 points in the pre-market on Tuesday. All other indices follow this curve on a percentage basis.

On Monday the Dow was up 1.3%, the S&P 500 was up 1.5% and the best any market can do to follow that is Germany’s DAX is up 0.5% with every other global exchange being lower with many in the red.

Yes volatility usually ramps up in September and October, but the directionality is the troubling aspect since it is being directed by Fed comments.

As I have said numerous times, I don’t see a hike in September or November, as the Fed cannot go it alone against EU, Great Britain and the Asian countries.

Be that as it may, the Fed may have the votes to go early, but the White House does not have the intestinal fortitude to stomach the fall out from a rate hike thisclose to a presidential election.

Now, can all this volatility and misdirection really be over a 0.25% rate hike in the US? Hardly.

As I wrote yesterday, the overnight lending facilities — the lifeblood of the global banking system — are drying up or getting to high. Take a look at any of the Libor flavors across the globe.

In the US overnight lending rates have moved higher by 0.45% this month as shortish term corporate borrowing is slated to have big changes coming on October.

Federal regulations in October are changing how money market funds calculate their net asset values and whether they can “break the buck.”

All this is really back-room plumbing, but it did lead to the September 2008 equity crash as one large money market fund — The Reserve Primary — broke the buck four days after Lehman Bros. bankruptcy and cause the market to crash on Friday necessitating Treasury to back the money market funds to quell the sell-off.

All this is leading to higher borrowing costs for corporate and banking firms in the shortish duration, which is putting a strain on the system.

Why the federal regulators believed the middle of October was a good time to change this rule is beyond me. Liquidity is generally in short supply this time of year anyway, so to constrict it further seems ill-timed to me.


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