While mainstream media eyes have been focused on wrecked tech stocks and towering trannies, professionals in the world's largest liquidity markets have been shocked at the sudden explosion in one chart... that most everyone is hoping is not 'real'.
With central banks puking money at low or negative rates to anyone who can fog a mirror, the sudden spike in EONIA, or overnight money rates in Europe, which we first highlighted yesterday, is quite a shock in a normally stable market.
EONIA has spiked from -36bps to -24bps in the last 2 days and the authority that 'manages' this index has verified this is not a 'fat finger'.
Traders everywhere are scratching their heads - here's why:
Bloomberg explains that EONIA is not a posted rate where banks would like to do business, such as Libor, but a weighted average index of actual trading in unsecured overnight money.
It's a real number, not an aspiration or an advertisement. It hugs the European Central Bank's deposit rate, which is the fixed rate the ECB charges for commercial banks to place money with the central bank.
The fact that it measures reality might suggest that the recent jump signals a deep problem in one corner of Europe's financial plumbing. The spike has to reflect bank-to-bank business; we can rule out transactions with the ECB because these are not included in the daily fix.
As Bloomberg notes, this naturally raises the question of who are the culprits. Certainly no institution is putting its hand up to claim responsibility. The most likely explanation is a technical hitch, rather than some sudden crisis warning.
The cause of the spike could be a U.S. financial institution that has switched its year-end accounting period from Dec. 31 to Nov. 30. This may have driven a sudden need for short-term liquidity, thereby causing a squeeze.It was month-end for many financial institutions on Thursday, on top of which we are approaching year-end periods, when cash and collateral rates often get squeezed.
A bit of indigestion shouldn't be a surprise. But a move this big is.
In a more amusing explanation, Citi writes that "an extraterrestrial with only visibility of the Eonia fixing, familiar with the traditional relationship between Eonia and ECB depo rate, could mistakenly conclude the ECB has gone for a mini rate hike or withdrawn significantly amounts of liquidity from the Eurosystem over the last two days."
Alas, excess liquidity sits around EUR1.85tn still and ECB tightening is at a minimum 9 months (if not longer) away as the Governing Council has clearly telegraphed an orderly sequenced approach which will first see ECB asset purchases continue until September 2018.
Wednesday's EONIA fixing (coming in around 6 bps higher than expected at -30.1 bps) caused mild excitement yesterday with a flurry of activity in the Eonia market. Market participants resigned to a quiet end to the year saw 1w - 3m trade 0.6-1 bps higher. Last night's month-end whopper (coming in some 10bps higher than expected at -24.1bps) has unnerved the Eonia market further this morning with 1w-3m another 1-1.5 bps higher as the first fixing is recalibrated and receivers begin to worry how much longer this apparent insanity will persist.
Ultimately little is known about the cause of the higher fixing of late at this stage (but the EMMI confirmed the accuracy of Wednesday's fix yesterday i.e. no fat finger).
There tends to be some seasonality in the Eonia prints but nothing was expected for this time of year and of such magnitude.
Unsecured overnight EUR volumes have dwindled in the last few years, with the average being a mere 7-8 bn (this year) on which a volume weighted average rate is calculated, so it would not take much to move the needle. There are two explanations:
1. There is a new participant in the Eonia market desperate for liquidity and paying a hefty price (possibly who missed out at the weekly MRO). This seems to be supported by the relatively elevated volumes in the last few days (vs the few weeks prior and in comparison to the last few month-ends for the November 30 number). In this scenario higher fixes could persist until next Wednesday with the possibility of relief by going to the weekly MRO on Tuesday should said counterparty be eligible.
2. The existing trades are going through at a higher levels on average. This is the fear driving the whole curve higher and would be a sustained/permanent move.
In summary, our view is this is only a technical issue for the EONIA market (although no-one can say if it is temporary or permanent at this time) and underlying fundamentals of European money markets remain unchanged (with repo rates unshaken thus far) so all spreads to Eonia should adjust accordingly (i.e. FRA/EONIA should compress, Schatz/Eonia should widen). We expect limited passthrough to 3M Euribor although lazy longs in front ER contracts may suffer from opportunistic selling/liquidation. The 10:05 publication requires close attention to assess the actual impact. Fwiw, the range of the fixing has been -33.2 bps to -32.8 bps while the 3M Eonia high low has been -36.2 bps to -35 bps over the same period.
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So far there has been no contagion other than very heavy volume in December Euribor contracts.
In order to get a grip on whether this is technical or not, traders will be eagerly watching today's fix, which will come around 1:00 p.m. New York time, to see if the high prints disappear as we enter a new trading month.