Posted on 11/25/2007 7:08:17 AM PST by TigerLikesRooster
Derivative liquidity crisis ‘to continue’
By David Oakley in London
Published: November 23 2007 23:38 | Last updated: November 23 2007 23:38
The world’s biggest derivatives markets could suffer serious liquidity problems until the end of the year, bankers have warned.
As worries over the health of the financial system weigh heavily on banks and funds, the vast over-the-counter markets in equity, credit and interest rate derivatives have seen trading volumes slow to a trickle.
Hawkins, equity derivatives strategist at Lehman Brothers, said: “There is a huge amount of uncertainty out there with extreme volatility. If you have made money this year, you could see your profits wiped out. On the other hand, if you have not had a good year, you have no money to play with. This has caused liquidity to dry up, and it could go on like this until the end of the year.”
Suki Mann, credit strategist at Société Générale, added: “Liquidity has been very poor for a while, but last week it just got worse. There is so much hanging over the market – oil, the dollar level, the banking sector problems, subprime, the monolines, worries over recession in the US – it has deterred people from getting involved.”
The sharp slowdown in these markets is a serious warning sign of the growing problems in the financial world as they are usually highly liquid, turning over vast amounts of trade every day.
According to the Bank for International Settlements, over-the-counter equity, credit and interest rate derivatives markets are worth $400,000bn, dwarfing the $60,000bn in the value of share trading on the world’s 10 biggest stock exchanges.
Bankers say many investors will remain on the sidelines until the new year because of the uncertainty.
Other worrying signs for bankers and traders include the elevated levels in interbank money market rates and on the Chicago Board Options Exchange Volatility index – known as the Vix and often described as Wall Street’s fear gauge – which is trading close to four-year highs.
The Vix, which measures volatility on the US S&P 500 index, rises in times of uncertainty and when underlying stocks fall.
The index was trading about 25 at the end of last week compared with about 15 in the middle of September when hopes had risen that the problems in the financial markets had peaked.
In the money markets, the three-month US London interbank offered rate rose to 5.04 per cent on Friday – 54 basis points above the US Fed funds target rate of 4.5 per cent – a record high and the eighth day in a row that it had risen
ping!
It's far more "worrying" when the VIX persistently pegs multi-year lows, as it has for years now. A spiking VIX means the market is doing its job.
The last two months have seen net outflows of investments in our treasuries by Asian investors. And only small improvements in the current account deficits. So even our government may be feeling the liquidity pinch.
This is quite a disconnect between these two rates. Larry "Cassandra" Kudlow is already pontificating that the Fed will not cut rates again at their next meeting on Dec 11 because the US$ is hitting new lows virtually every day.
~~Only Yesterday: An Informal History of the 1920’s by Fredrick Lewis Allen
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