The market is looking to normalize after a rocky start of the week. The Yen has weakened again to 148 and that has provided some needed stability. The question is wether this is a temporary calm before a bigger storm, or just some breather for the markets to keep climbing the wall of worry. The key indicator in these cases is liquidity, and if you look at the chart below, it doesn’t indicate we’re out of the woods yet. It shows the yield error in the treasury market: the higher the error, the lower the liquidity. It’s measured at peak stress, so we will need to see how it evolves in the coming days/weeks to assess wether things are really calming down or some tension remains, which often transmits to other asset classes. It’s also important to see of a systemic institution, such as a bank or a hedge fund, has not been severely affected by these market moves, as margin calls are being executed. On the positive side, the Fed is surely watching the actual market fragility to incorporate more data points into the interest rate decision making process.
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Chart source: Jim Bianco
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