Approaching Crisis Levels: Intensifying Strains in Global Dollar Funding Markets!

Last Sunday, I wrote about the ongoing turmoil in wholesale finance. I highlighted the warning by the central bank of central banks, the Bank for International Settlements, of a progressing 'widespread failure' .

In particular I wrote,

In short, the relationship between interest rates and currency values has been rendered dysfunctional.

Previously funding pressures have appeared in times of "relative calm".

Today in the face of an event risk such as Brexit, such funding pressures appears to have been amplified

From the Bloomberg:

Money markets are flashing warning signals as rising credit risk, spurred in part by fears of Brexit, makes it harder for big banks to obtain U.S. dollar funding.

A gauge of bank borrowing costs -- the FRA/OIS spread -- hit the most extreme level since 2012 on Thursday, and the premium to swap foreign currencies into dollars reached the highest since late last year as deteriorating investor sentiment ahead of Britain’s June 23 referendum on European Union membership strained the financial system.

The latest bout of turmoil illustrates how regulatory changes introduced after the financial crisis are leading to greater volatility in episodes of stress. Banks, facing higher costs to make markets, aren’t stepping in as they did in the past to take advantage of arbitrage opportunities in funding markets, leading to bigger price movements…

Banks around the world are active in dollar lending due to the greenback’s dominant status in global trade invoicing and the outsize share of dollar-denominated assets held in global investment portfolios.

The average cost to swap euros, Japanese yen, British pounds and Swiss francs into dollars for three months rose to 44 basis points, or 0.44 percentage point, above the London interbank offered rate Thursday, the highest since December. At year-end, a combination of the Fed’s first rate increase in nearly a decade and banks paring down balance sheets to meet year-end regulatory requirements led to spreads as high as those seen during the European banking crisis in 2011.

Lehman Crisis

“There is a scarcity, similar to what happened during the Lehman event and European crisis, of dollars,” said Priya Misra, global head of interest-rate strategy at TD Securities (USA) LLC in New York, referring to the collapse of U.S. investment bank Lehman Brothers Holdings Inc. in 2008. “It might be on a smaller scale than Lehman but the essence is very similar, where you have a shortage of one currency.”

One of the ways to predict a forthcoming volcanic eruption have been to identify or recognize the appearance of a series of earthquakes prior to the event. Or as the Pacific Northwest Seismic Network noted (bold mine)

Volcanically-caused long period earthquakes are produced by vibrations generated by the movement of magma or other fluids within the volcano. Pressure within the system increases and the surrounding rock fails, creating small earthquakes. In 2004, Mt. St. Helens began dome building eruptions as magma was thrust upwards accompanied by long period earthquakes. These earthquakes are an indication of magmatic activity and may be a precursor to an eruption. When these earthquakes occur continuously the result is volcanic or harmonic tremor. Mount St. Helens exhibit these long period earthquakes months in advance of 1980's eruption.

The volcanic tremor can be used to warn of an impending eruption allowing people living near the volcano can to be evacuated to safer areas. This method of prediction has been used successfully to predict the eruptions of Mount St. Helens in the 1980's and the 1991 eruption of Mt. Pinatubo in the Philippines.

The increasing incidences of market crashes (since 2013), the ongoing deepening strains in wholesale finance, the $10 trillion+ and growing negative yielding bond markets, sustained crashing of European-Japanese banking stocks, the Chinese yuan's weakening, US dollar strength and more, all combine to look like preliminary manifestations of "volcanic or harmonic tremors" in motion, only that these applies to the sphere of the global financial markets.

If such morphs into an actual financial eruption, which countries will be immune?