Up to this week, financial market participants seem to have been able to shrug off just about all the negative news coming out of the White House, yet yesterday’s new tariffs specifically against China have clearly been unsettling to investors, particularly as China responds with its own set of measures in what seems to be an emerging trade war. One other area that markets are starting to become a little jittery about, however, is the growing evidence of stress in the credit markets. Over the last few weeks, the focus has sharpened on a sustained widening of the LIBOR-OIS spread. The re-emergence of both this and the TED spread has jarred the memories of those of us who were working in financial markets during the last financial market crisis. Back then, the TED and Libor-OIS spreads were gauges of financial market stress and were monitored on almost a minute-by-minute basis as banks lost trust in each other (remember all those Level 3 assets?), and the financial system went into meltdown. Just why this has suddenly becomes a key area of market focus this week is important and, therefore, the topic of this week’s Economics Weekly.
For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.
Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.