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Daily Market Commentary

It's no question everyone has read about liquidity concerns lately.  If you've made it this far in the launchpad, or read a business section this week, you'll have already read about ABCP and the banks closing their wallets.  The lack of sizeable commercial paper programs in Canada led to the origination of Asset Backed paper, which all the Canadian banks have been writing for some time.  This paper, which is over-collateralized by 10%-25%, has little concern about the credit of the underlying assets, however, it does require liquidity to borrow short duration against long duration assets.  This mis-match is the problem in the market today.  The story is starting to play out with the borrowers demanding that the banks step in and provide liquidity to be able to fund their shorter term maturities, as required in many of their covenants in the case of loosely defined "market disruptions".  We will see how many of the banks step up and provide this liquidity, but keep in mind this is a liquidity issue and not a credit issue.


  As mentioned in last week's Snapshot, the CAD$ - volatility correlation continues, as the long "carry trade" currencies are getting creamed against the Yen and the greenback.


US CPI was out this morning, in line with expectations and continuing the downtrend in inflation witnessed since the start of the year.


The treasury market is flat so far, but traders really aren't focusing on economic fundamentals - which the FAST desk has reminded us are backwards looking - when there is so much turmoil in the markets.  Many participants are still calling for drastic Fed intervention in the form inter-meeting rate cuts, so that will dominate the thinking for the time being.


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