If we told you that equities would be flat yesterday in US session on the backdrop of weaker than expected Chinese macro, the biggest oil shock since the early 1990s and a galloping USD funding crisis, you have rolled your eyes. But that’s the market as of yesterday. Equities are a bit risk-off this morning, but all equity markets look like they are rolling over, so unless FOMC tomorrow delivers some magic on the guidance then traders should shift into short positions on equities.
USD funding crisis is serious
The talk of town yesterday was the apparent spike in the FRA-OIS spread which is essentially the spread on LIBOR-Fed Effective Rate swap. If this spread rises the is a USD funding issue and creditworthiness among banks is deteriorating. In addition to the blowout in the FRA-OIS spread the general collateral repo rate in the US funding market also spiked yesterday sending worrying signals to the market that the Fed might be losing control over policy rates. If the FOMC is not openly talking about these events and downplaying the current situation then it’s risk-off tomorrow across the board as it will be a policy mistake on par with the December 2018 decision to hike.