Monday, October 17, 2016

Concerns in Libor Market

CPI data and the Rate Hike

The important inflation data of today (Consumer Price Index) was in line with the consensus 0.3% and higher than the previous month (0.2%), that is to say because it is so flat it does not contribute anything far-reaching to the discussion of the FED on Rate Hike. As I have been saying for a few days: Wall Street, in the immediate future, will no longer move on this issue because it already assumed it (that the Rate Hike will be given in December) but for other conjunctures: the result of the 3rd Clinton-Trump debate tomorrow, see the oil /CL breaks the psychological barrier of $50, and business results. On this last point, after the bad start of Q3 earnings with Alcoa AA, these come in strong rally with many 'beats'. Earlier in the day, Goldman Sachs GS joined the group of winning banks of the week by widely exceeding consensus EPS ($4.88 vs. $3.79), while the popular Netflix NFLX is around + 20% higher report considerable increase of its subscribers, among others. Therefore, the SP500 index SPX is around 1% at the moment.

ECB will continue its QE ?

Maybe it is a reason to keep an eye on other key markets such as the eurozone. So, this Thursday has the announcement of the European Central Bank ECB and its stimulus policy Quantitative Easing QE, being the only doubt: will it always extend until March 2017? If we compare it to what happened in the post-crisis USA, between 2008 and 2014, (see graph below) I would say that they still have the field to do it. Attentive to this news that moves world markets with force.

On the left, the direct effect that the QEs had on the NYSE. On the right the comparison of assets between the FED and the ECB: doing it with caution, the Europeans have place to extend it.

High inflation data in UK

And outside the eurozone, we have the United Kingdom: today the English CPI in September reported the largest monthly rise in inflation since 2014, reaching 1%, compared to 0.6% in August. The decline in i-rate and the QE of a few months ago seem to have had a rapid effect on the English economy, so much so that it is already worrying that inflation can reach levels of 3 to 4% for 2017 just in times that the pound passes through historically low levels and this may be what is causing the rise in prices of consumer goods, and not the QE stimulus. The expectation of Theresa May and her team is to reach the 2% inflation goal, trying not to exceed the growth rate of her population's salary (currently around 2%) and avoid these falling in real terms. They are the first visible effects of Brexit.

The pound at its worst in 31 years, and the FTSE100 reaching all-time highs. 
While therefore, inflation is fast moving ... and the Brexit hard is coming

Concerns in the Libor market because increase in its rate

With respect to the Libor market, there is concern over the excessive rise in its rate, which is a reference in many financial transactions and short-term derivatives worldwide, in clear contradiction with the FED and the majority of global rates that remain stable throughout 2016. It lends itself to suspicions about the history of 2011 where manipulation of this rate was detected to benefit 16 world banks (if not: Bank of America, JPMorgan, Deutsche Bank, Barclays, HSBC, among others ... Their greed has no limits.

This time, the 'official' explanation for this fact is that this month we must complete the implementation of Money Market reforms by the SEC, the US Securities and Exchange Commission. It stipulates moving active millionaires from large international banks to government ones, to be used only by government instruments. They argue that the very high demand of these funds in these months in international banks, has raised the Libor rate. Sounds nice, but... we believe the bankers ?

Similar increase in the LIBOR than in 2011, the year of the uncovering 
of the fraudulent management of this rate ...