Funding Stress Contagion Spreads - European Banks Collapse To 11-Month Lows

Yesterday we exposed the globally contagious spread of funding market distress into the credit risk of major US banks, and today it has accelerated, spreading to Europe's banks as their stocks crashed to the lowest in 11 months...

Deutsche Bank is leading European banking's collapse...

But this is a serious move for the broad EU financial system...

 

Credit risk is breaking out...

As Credit diverges extremely bearishly from stocks...

 

And it's about to get even worse...

As three-month dollar Libor extended its streak to 32 straight increases, though the rise in the setting is the smallest since March 8. The crucial USD Libor-OIS spread rises to 56.8bp, widest level since May 2009 (as 3M Libor at 2.2856% is the highest since November 2008, vs 2.2711% prior session).

As we noted yesterday, the key is whether rising Libor rates will fuel a funding crisis - something we have been worrying about all year (as we detailed above with the blowout in the Libor-OIS spread)...

“We usually don’t see this kind of divergence in rates without some sort of credit issue,” said Margaret Kerins, head of fixed-income strategy at BMO Capital Markets Corp., referring to Libor’s rise versus OIS.

“At what point does all this become damaging and how far does it go? That is the issue.”

It appears to be damaging now..

“There has been sort of the perfect storm of factors tightening financial conditions,” said Russ Certo, head of rates at Brean Capital in New York.

“Banks do have tremendous liquidity still, but it’s at a higher price.”

But, but, but... "fortress balance sheets"?