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8th January Market Commentary

By Henry Adams on 2020-01-08

Financial markets ended the year in relative calm, with the Fed carefully managing the volatility often associated with the season. The consequent stable prices and good liquidity allowed markets to hold on to the significant upside of the prior twelve months. This made for a far happier Christmas...

versus the previous year-end, when returns were largely wiped out. Greater certainty in direction for the UK and positive trade noise between the US and China has helped keep markets buoyant, despite growing tensions in the Middle East. Whilst indices initially shrugged off the Soleimani headlines, it seems Iran is not looking to be a spectator, as evidenced by missile strikes on American air bases in Iraq already. Safe havens such as gold, government bonds and defensive stocks are receiving much love in the last couple of days.

UK Treasury Bills saw the usual increased demand over year-end, leading to higher prices for redemption dates into this year. These should start to normalise and would be expected to return to the high 0.60's and possibly low 0.70's over the next few sessions. Last week's auction was smooth with buyers paying more for the 3 month issuance, which offered the first maturity date that extended safely into Q2. Further along the maturity ladder UK Gilts have been selling off a little. This is primarily being driven by the spending plans of the new government, which for 2019-20 alone would imply an additional £14Bn of debt issuance. Punters are also expecting that this increase in fiscal spending will reduce the odds of a cut in the benchmark rate in the foreseeable future.

After all the fuss, intervention and the Federal Reserve putting all its old and new tools to work, the apocalypse in short-term interest rates and financing markets as the clock struck twelve was averted. How has this left us as we go into the new year? Well..treasury bills remain pricey, whilst funding markets have also stabilised at levels where investors can still achieve a premium of 10 basis points for financing government assets. However, the prudent banks are and will continue to look for opportunities to diversify their financing, particularly in assets that are less liquid, to ensure they are less at the mercy of highly correlated financial markets, knowing from experience that it is always quiet before the storm. With an oversubscribed term repo operation yesterday it seems cracks are already starting to appear.

Below a couple of interesting articles, we came across over the festive period. Nice to see others talking about the liquidity risks we have been drumming on about for a large proportion of the last decade under various guises!

On the whole, with rising uncertainty in global markets, corporations have been increasing reserves/reducing capital spending over the course of 2019. Over half of the companies surveyed are now net long of cash. When it comes to managing these rising balances, 20% eliminated prime money funds from policy whilst adding new asset classes as well as greater prudence around the credit rating of counterparties was on the agenda for many.

2019 Cash Management Survey: How Corporate Treasuries Are Seizing the Moment

The Bank of England continues to be concerned about the imbedded liquidity risk of open-ended funds and the potential impact of more widespread consequences leading to instability in UK financial markets due to distressed selling of illiquid assets and the inevitable price volatility that follows. Potential for contagion particularly with those funds with strong ties to respective banks has led the Bank to believe that redemption notice periods must more realistically match the ability for a fund to manage these outflows in a timely manner, that does not have the potential to disrupt the broader system.

BoE: Fund liquidity mismatches could 'amplify shocks in the financial system'

An FTF or Fixed-Term Fund is a regulated fund investment that offers exposure to a single investment-grade obligor for a fixed term, without the need for any client infrastructure. An FTF has many of the same characteristics as a term deposit, but can offer exposures outside of the banking sector. TreasurySpring is originating FTFs with sovereign, financial and corporate obligors.