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Monday, May 26, 2008

This Bear Market Rally is Over: EURIBOR Rises Again

I’m telling you (again), central bank measures to inject liquidity aren’t working…

Euro Money-Market Rate Holds at Highest Level in Five Months: “The cost of borrowing in euros for three months stayed at the highest level since Dec. 18, according to the European Banking Federation.

The euro interbank offered rate, or Euribor, was at 4.86 percent today, unchanged since April 29, EBF data showed. The one-week rate held at 4.22 percent today, the highest level since May 13.”

It gets worse the further out you go on the curve…

12-month Euribor rate goes through 5.00%: “The 12-month Euribor rate, used as a benchmark for most Finnish housing loans, rose on Thursday to the psychological level of 5.000%, for the first time since December 2000.

Two factors have been pushing Euribor rates upwards.

On the one hand, accelerating inflation and the European Central Bank's anti-inflation statements have reduced investors' expectations of any cuts in ECB benchmark rates, and on money markets there is already an anticipation of a rate hike.

A second factor is the banks' common sense of caution as a result of the credit crunch in the international lending market. Banks are demanding a risk premium in their interbank borrowing, which lifts the market rate.

On Friday the 12-month Euribor jumped upwards once again to reach 5.028%, further increasing the borrowing burden of home-owners, although according to the Bank of Finland, an increasing number of Finnish borrowers are turning to the banks' own prime rates.

The 6-month Euribor rate was also up appreciably on Friday, from 4.906% to 4.915%.

The longer-denominated Euribor rates have been heading inexorably upwards since February of this year, in company with burgeoning prices for crude oil, which surged again on Thursday, peaking at around USD 135 a barrel.

The 12-month Euribor was at its highest level, 5.341%, in late August 2000.”

This is a disaster in slow motion. Even as central banks coordinate to cut rates to prevent the implosion of the largest debt and real estate bubbles ever, the market is driving rates higher whenever and wherever it can.

The most desperate and innovative of measures implemented by the Fed, such as the TAF, TSLF and PDCF, have done little to help (TAF, TSLF and PDCF Explained). Even coordinated reductions in the quality of collateral by all central banks have failed to help (The Race to the Bottom Accelerates).

There really isn’t that much more that can be done with rates this low, inflation this high and central bank balance sheets already heavily committed.

How bad is it, and how little maneuver room do the central banks really have? Well, that is still being debated, but it does not look good. In Really Scary Fed Chart: MAY, False Alarm? I present the arguments put forth by Market Ticker and Calculated Risk and find myself more in the pessimistic than optimistic camp.

Euribor is likely to spike further and faster as risky assets, such as equities, now begin their next leg down.

The rising Bear Wedge on the S&P 500 has definitely broken DOWN and OUT. Prices are currently entangled by the 50 day EMA after slicing through the 200 day EMA like a hot knife through butter. A pause is probable and a bounce to 1400 possible, but believe it: This Bear Market Rally is OVER. (Bear Wedge Breaks, Goldman, Lehman, Merril, Morgan: Cut to SELL)

What is the Euribor?

Related Posts:
ZEW Hits Record Low, LIBOR Woes Hurting Eurodollar
Libor Poised For Shake-Up, Credibility GONE
RISE Dark Lord Libor! RISE!
The Race to the Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
The TED Spread, LIBOR and EURIBOR = Scary Bad


Anonymous said...

What will things look like when the worst comes to past?

Thai said...

Ben, you made it to Congratulations! That's the first time I have seen your blog anywhere besides the bottom of Hell's blog. You are getting quite a following.

By the way, did you ever learn any more about 'JEM'?

Ben Bittrolff said...


JEM: Haven't had the time...

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