Will stress in the repo market abate?
Will stress in the repo market abate?An abnormal bout of stress in one of the most vital sources of short-term funding for banks, which sparked concern across financial markets last week, will continue to be in sharp focus this week. Interest on repurchase — or “repo” — agreements, a form of overnight lending relied on by banks and investors to cover short-term cash needs, spiked to unusually high levels. The blip was triggered by the combination of heavy Treasury bond issuance and a mid-September deadline for US corporate tax payments, which together squeezed the bank reserves that fuel the market.The New York Federal Reserve stepped in with four days of liquidity injections to support the market, in an effort to bring the repo rate back in line with other market-based interest rates.The squeeze revealed the effects of the growing US federal budget deficit, which weighs on bank reserves and which will increase the chances of similar bouts of stress in the future, according to Bank of America analysts.“While the Fed intervention seems to have taken immediate pressure off the repo market, it had to continue to intervene to keep things stable,” the analysts wrote on Friday. The US central bank now faces the prospect of finding a long-term solution to stabilise the market.“We’ll see a lot of angst going into quarter-end and can’t help but believe that Fed intervention of some form over September 30 may be required,” said BMO Capital Markets analysts. “To avoid intraday volatility, perhaps a term funding option will be rolled out to provide reserves well in advance.” Richard HendersonHas the oil price rally stalled?After its record-breaking surge last week, there is only one question weighing on the minds of oil traders: can Saudi Arabia restore lost oil production by the end of the month? Brent crude jumped by as much as 20 per cent last Monday after a drone and cruise missile attack knocked out half of Saudi Arabia’s production capacity, a staggering 5.7m barrels a day.Following the raid on the kingdom’s most important oil-processing facility, authorities moved quickly to reassure the markets, claiming half of lost production was already back online and the rest would follow by the end of the month. Those comments helped push oil prices back down from a peak of nearly $70 a barrel. But some doubt remains over the kingdom’s ability to restore the full flow of oil to global markets. People briefed on the damage at the oil facility told the FT that it could take months to resume output as normal. If such a prolonged outage looks likely, then oil prices can be expected to continue their upward trajectory.Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, admitted that the country’s full production capacity of 12m barrels of oil a day would be offline until at least the end of November. Oil prices will need some time to shake off the higher risk premium.“The global market is currently operating with minimal spare capacity, heightened supply risk, and relying on inventory draws to meet demand,” said Paul Horsnell, head of commodities research at Standard Chartered. “Prices are currently just 6 per cent higher than before the attacks, which in our view is not enough of an increase to fully price in the reduction in spare capacity, let alone reflect either the increase in supply risk or the cumulative supply loss.” Harry DempseyCan Hong Kong pull out of a trade tailspin?More than three months into an unprecedented political upheaval, hardly a day goes by in Hong Kong without additional dour developments concerning its economy, investment environment or debt ratings. The latter in particular have added to investor unease, with Fitch recently downgrading Hong Kong’s issuer rating and Moody’s changing its rating outlook to negative.That has piled more downward pressure on the territory’s Hang Seng equities index. It is trailing the S&P 500 by about 18 percentage points year to date — and this week will probably add another negative reading to the list: trade.Thursday will see the release of the August readings for Hong Kong’s imports, exports and trade balance. The territory has long since developed beyond its role as a manufacturing hub or even the main channel for external trade with China.But China’s slowing growth has been a big drag on Hong Kong’s, which like Singapore is an open economy with heavy exposure to the region’s biggest economies. Most of Hong Kong’s exports are re-exports originating from China, so outbound shipments serve as another reading on the mainland’s economic health and thus the territory’s own growth prospects.The US-China trade war has predictably battered Hong Kong exports, which have been in contraction for nine straight months and fell 5.7 per cent from a year ago in July. With a preliminary reading for Hong Kong’s August container throughput showing a drop of almost 3 per cent, the odds of adding another month to that losing streak look high. Hudson Lockett