Thursday, November 6, 2008

[Latest Endogenous Liquidity Index: -60.8%; Latest Global Dollar Liquidity measure: +29.6%]

Liquidity-wise, the news today is dominated by the policy moves from both the Bank of England and the European Central Bank. The Old Lady moved first, and she decided to surprise financial markets with a 150 bp cut. The Bank rate stands now at 3.00% [communiqué]:

Since mid-September, the global banking system has experienced its most serious disruption for almost a century. While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time. As a consequence, money and credit conditions have tightened sharply.

The most serious disruption for almost a century! Now, that's seems to justify the audacity of the move! Now consider the ECB. Shortly after the BoE decision, many market participants thought that the Trichet Boys would go for a 75 bp, or even a 100 bp, cut. To no avail. The ECB opted for a tepid 50 bp move, taking the marginal lending facility to 3.75% [communiqué]. And here comes the interesting part. Guess what's happening to the euro/sterling cross? Actually, the pound is rallying. When FX markets react like that, it means that (nervous) investors are paying attention to asset markets in general, and not only to yields on short-term debt instruments.

[PS. The Swiss National Bank also announces a "relaxation of monetary policy", lowering the three-month Libor target range by 50 basis points to 1.5%–2.5%].

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