The turmoil between Russia and Ukraine is triggering stress alarms in the markets

Illustration shows US dollar banknotes
United States dollar banknotes are displayed in this February 14, 2022 photo illustration. REUTERS/Dado Ruvic/Illustration

March 5, 2022

By Dhara Ranasinghe, Yoruk Bahceli and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK (Reuters) – Financial indicators on Friday signaled increasing signs of tension spreading in global markets as concerns mounted over the broader economic fallout from Russia’s invasion of Ukraine.

With stock prices and bond yields falling, indicators considered to be stress indicators are attracting investors’ attention.

The so-called FRA-OIS spread, which measures the gap between the three-month US forward agreement and the overnight index swap rate, hit its highest level since May 2020.

A higher spread reflects increasing interbank credit risk, or hoarding of US dollars by banks, meaning it is widely regarded as an indicator of banking sector risk.

The US-FRA-OIS spread widened to 32.29 basis points on Friday, compared to 23.7 on Thursday.

Global alarm was previously sparked by a fire at the site of a Ukrainian nuclear power plant, Europe’s largest, after it was seized by Russian forces. The fire is out.

“Market liquidity conditions have deteriorated this week and were exacerbated overnight following reports of the shelling of Europe’s largest nuclear power plant in Ukraine,” said ING currency strategist Francesco Pesole.

Still, the FRA-OIS gap remains well below the levels seen at the height of the market turmoil in 2020.

“Dollar financing conditions are not overly alarming right now, but the deterioration over the past week certainly speaks for a stronger dollar,” Pesole added.

The dollar index rose nearly 1%, mostly at the expense of the euro, which fell 3% this week on Europe’s exposure to the Russian economy.

Another closely watched short-term funding stress indicator, the spread between US three-month Libor and the overnight index swap rate, also rose to over 18 basis points, the highest since May 2020.

The LIBOR-OIS spread is the credit and term premium that a lender would charge for a three-month unsecured loan versus an overnight bank loan, such as a 3-month unsecured loan. B. the Effective Fed Funds Rate, the risk-free rate set by the Federal Reserve.

“In our view, this week’s unsecured funding pressures reflect a precautionary build-up of cash, exacerbated to some extent by the forthcoming Fed rate hike,” Barclays managing director Joseph Abate wrote in a research note.

“Although Libor has lost much of its importance since the end of the year and the end of banks’ ability to enter new trades, the rate is still seen as an early warning barometer of financial market stress,” he added.


Dollar demand was reflected in swap markets, where dollar borrowing costs continued to rise. For example, three-month euro-dollar swaps rose to around 27 basis points from 15 basis points on Thursday.

However, swap rates remained below the March 2020 peak of nearly 40 basis points hit on Monday, and analysts said the Federal Reserve and other major central banks have mechanisms in place to ease funding stress.

Stress metrics are on the rise elsewhere, too.

The cost of insuring exposure to a basket of junk-rated European corporate bonds rose 398 basis points to its highest level since July 2020, the iTraxx European Crossover Index showed.

Another iTraxx index, which measures the cost of insuring exposure to senior debt from banks and other financial issuers, rose 7 basis points to 91.7 basis points, a high from May 2020.

A European bank stock index fell 16% this week, plagued by Western sanctions on Russia, a downgrade in rate hike forecasts and a deteriorating macroeconomic backdrop.

Also in focus was the daily number of repo fails, which occurs when a market participant is unable to deliver the security in time to complete a repo transaction.

Societe Generale said daily Treasury repo fails rose to $76.1 billion on Feb. 28, the highest since June 2020 and more than double this year’s average.

While repo defaults are relatively common, a large number of defaults in volatile markets indicates dislocation and stress.

(Reporting by Dhara Ranasinghe; Additional reporting by Saikat Chatterjee, Sujata Rao and Yoruk Bahceli, Gertrude Chavez-Dreyfuss in New York; Editing by Sujata Rao, Alexander Smith and Marguerita Choy) The turmoil between Russia and Ukraine is triggering stress alarms in the markets

Caroline Bleakley

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