Posted on 16 October 2008 by
Another bad day for the markets yesterday, with the Dow finishing 733 down, the Nikkei 1,089 and most other indices were in negative territory. It is also not looking promising today as the FTSE slips below 4,000 in early trading! This is primarily down to fears over the global recession with some very weak economic data coming from the US, which many fear is on the verge of recession, if not in one already.
The other main concern is that despite the Governments efforts, the banks are still not lending to each other & 3 month Libor (although it came down by 3bps yesterday) remains worryingly high.
Libor, by the way, stands for the London Interbank Offered Rate and is the rate of interest at which banks borrow funds from each other, in marketable size, in the London interbank market. LIBOR is the most widely used "benchmark" or reference rate for short term interest rates. It is compiled by the BBA in conjunction with Reuters and released to the market shortly after 11.00am London time each day.
To put it simply, in the first half of 2007 the gap between 3 month Libor and the average of expectations of overnight interest for the following 3 months (OIS Rate) was 0.09%. i.e. 3 month Libor was pretty much in line with what the Bank OF England would charge for overnight money. In August '07 (start of the "credit crunch") the gap became 0.23%. Since August '07 it has further widened to 1% but never much above this. In September this year it began to worsen & as of last Friday hit 2.19%, before falling to 2.02%.
So basically the banks will only lend to each other for 3 months at a rate of 2% above the Bank Rate. On that basis it is not surprising that we are seeing lenders unable or unwilling to lend to borrowers / businesses at anything like competitive rates and LTV's. Their appetite for lending appears to have been lost and it is concerning that at the moment nothing seems able to reverse this trend.
The good news (yes there is some) is that petrol came down below £1 per litre yesterday & Oil prices have come down by almost 50% from their peaks in July, & are at their lowest for 14months!
Another big bail out plan, this time from the Swiss, with UBS taking 6billion Swiss Francs and transferring up to $60billion of distressed assets to a new fund set up by the Swiss central bank. Credit Suisse was offered similar assistance but has managed to raise 10billion Swiss Francs from global investors.
Swap rates fell back yesterday but as yet we aren't seeing much in the way of repricing other than the baling of lenders from the 90% market!!! Overnight Libor came down by 5bps & 3 month Libor edged down 2bps, no where near the falls yet that we were hoping for.
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