After six weeks of calm, global financial markets are bracing for one more aftershock from the 9-month old credit crunch.
While the worst of the financial storm may well be over, the quarterly accounting scramble at banks and brokerages that has defined the crisis to date means it is probably wise to fasten your seatbelts again for the next four weeks or so. For sure, the end of the second quarter is likely to be a quieter echo of prior crisis peaks of September, December and March — marked in turn by the collapse of UK lender Northern Rock; a dramatic intervention by the world’s big central banks; and the demise of investment firm Bear Stearns.
US and UK central banks have opened up more critical cash support lines for banks and securities firms, major banks have already set about recapitalizing with gusto and bond and loan markets have recovered significant ground. But for those who profited handsomely from the recent market recovery — where world stocks and US have bounced, more than 10% since late March and corporate debt insurance costs have almost halved — it may not be worth tempting fate. “We are expecting to see a gradual increase in risk aversion coupled with wider spreads and rising volatility,” said Meyrick Chapman, strategist at UBS in London, adding that June 18 is the next critical date in the financial calendar. “We probably won’t see the same disruption as we saw in March, given the central bank action in the meantime, but we will see some reversal.”
UBS stresses the seasonal threat now central to the credit squeeze — where sudden illiquidity of mortgage-backed bonds last summer coupled with banks’ quarterly need to book those assets at market prices has forced huge debt writedowns and prompted solvency fears that paralyzed interbank lending. As a result, each of the last three quarters has ended in severe disruption to money markets as banks hoard cash and refuse to lend to each other while preparing quarterly accounts. And there has been some concern in recent weeks about how slow money market rates have been to ease despite narrowing credit spreads and rising equity spreads elsewhere.
But the UBS analysts highlighted a specific date that concentrates this stress and creates a “cash-flow bottleneck” that has defined the worst moments of the credit crisis. Pointing to the three dates last year which, respectively, hobbled Northern Rock on September 14, forced concerted central bank injections of dollar cash on December 12 and saw Bear Stearns bailed out on March 14, UBS said they all came within a week of settlement and contract dates on the International Monetary Market.
The IMM, part of the Chicago Mercantile Exchange, trades mostly currency and interest rate futures as well as credit default swaps (CDS). So-called IMM dates are critical quarterly benchmarks in the exchange’s calendar and fall on the third Wednesday of the last month of each quarter. The next IMM date, used for settlements for futures contracts in dollar deposits held outside the United States as well as contracts on the London Interbank Offered Rate, various options contracts and refixing of bond fund coupons, is June 18. What is more, there tends to be a rise in settlement breaks and interruptions around those dates, mainly in so-called nostro accounts directly between financial market counterparties. (The Economic Times)