Meltdown Postponed

A nervous stock market managed to hold some crucial levels on Friday as the US session rallied after gapping down on the open. This morning, thus far equities markets have failed to follow through on Friday's turnaround in a relatively quiet (European holiday affected) session. I believe the on-going negative environment in global markets is likely to keep markets on the defensive over the near-term. The recent turmoil in financial markets continues to pressure Libors as interbank lending tightens up. Libor spreads remain on the radar for traders and investors, the charts below highlight the recent tick-up in Libor relative to the OIS market. They also show the link between this funding spread and the stock market moves of the past few years. -- It is worth noting that the move has so far been relatively small compared to the 2007/2008 period. However I believe a) The stock market is far probably more sensitive to tightening liquidity than it was at the start of the credit crisis. b) It is unlikely (though not impossible) that we will repeat the highs of 2007 and 2008 in the Libor/OIS spread, since bank balance sheets are probably less exposed than they were during those periods, and much of their risk has been assumed by sovereigns.