A new theory on what shocked the overnight lending market - CNN

When turmoil erupted in the US overnight lending market in September, it came as a big surprise.

The spike in overnight borrowing rates forced the Federal Reserve to come to the rescue, pumping in lots of cash and restarting bond purchases. This eased any panic, and appears to have helped juice the stock market as an unintended side effect.

But a big question has loomed: What caused the shock, unprecedented since the global financial crisis?

In a new report, the Bank for International Settlements points to larger problems at play. This corner of the market relies heavily on the largest four US banks — and those banks have been holding more liquid assets in US Treasuries compared to what they store with the Federal Reserve, BIS notes. This could have contributed to the cash crunch.

Another factor: hedge funds, which have been financing more trades through this part of the market, per BIS.

The debate over what caused the problems in so-called "repo" markets is likely to continue. In the meantime, stocks could keep benefitting from the Fed's intervention.

Morgan Stanley estimates that global stocks have seen nearly $175 billion in inflows since September, with two-thirds of that heading to the United States. "So long as central banks keep pumping this liquidity in, and trade negotiations don't break down, we see little reason to think this can't continue," the bank's equity strategists told clients Monday.

Investors gear up for a huge week

If markets look calm this morning, it's just because traders are holding their breath ahead of what looks to be a very eventful week.

On the calendar:

• The Federal Reserve announces its latest decision on interest rates Wednesday. The European Central Bank will follow on Thursday.
• The United Kingdom holds its third general election in four years on Thursday, with big consequences for Brexit (and the pound).
• Another round of US tariffs on Chinese goods is set to go into effect on Sunday, December 15. That gives President Donald Trump less than a week to strike some kind of trade agreement with China.

Investors expect the Fed and the ECB to stay on hold as the trade environment remains uncertain, and the pound has rallied as traders bet that Prime Minister Boris Johnson will win the UK election, providing a clearer path forward on Brexit. But Wall Street is bracing for surprises.

"We may be reflecting back on this a week from now as hugely anticlimactic, but there's certainly huge potential for the opposite to be true," said Craig Erlam, senior market analyst at Oanda. "It's going to be exciting."

The outlook on trade, in particular, is extremely murky. With China posting a 1.1% drop in exports in November, there's clearly economic incentive to get a deal done. But whether both sides can actually reach an agreement by Sunday remains an open question.

Oil has jumped nearly 5% in the past week

Brent crude, the international benchmark for oil prices, is down 0.8% Monday. But it's still up nearly 5% in the past week, helped by the decision from OPEC, Russia and other oil producing nations to deepen production cuts in an attempt to support prices.

OPEC said Friday that the producer group would curb supplies by an additional 500,000 barrels per day, bringing the total cuts — which have been in place since 2017 — to 1.7 million barrels daily. Analysts said the rally gained strength after Saudi Arabia made clear it would continue to cut by more than its quota.

The timing for the surge is important. Shares of Saudi Aramco, Saudi Arabia's oil monopoly, start trading on Wednesday. Saudi leaders will be pleased that oil is now close to $64 a barrel, and not below $58, as in early October.

Chewy (CHWY) and Stitch Fix (SFIX) report results after US markets close. It's otherwise a slow day for economic data ahead of a very busy week.

Coming tomorrow: The UK releases GDP data for October ahead of Thursday's election.

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2019-12-09 12:09:00Z
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