Upcoming ECB Meeting Is Huge

Traders focused most of the day on various signals that would gauge the level of fundraising concerns in private and public markets. That follows wild moves in borrowing costs during the last few trading sessions as short-dated yields moved by astonishing increments of 60, 30, and 40 base points at a clip per day.

Liquidity issues are just one factor, as investors have a lot on their plate to digest. A spike in MOVE and VIX volatility and the surge in the FRA-OIS spread shows market demand for a higher risk premium has been pushed much higher.

But ultimately, investors are trying to determine whether tighter financing conditions will strain less-capitalized, cash-burning tech companies. But one thing that has become apparent and now hiding in plain sight is the undisciplined fantasy world  Venture Captial operates its stalls.

ECB

Today, the ECB will be the first major central bank to meet since financial stability concerns escalated and could foreshadow the Fed. While many prominent house economists maintain their baseline for a 50bp, many traders think a pause is more likely than a 25bp hike.

Compared to most policy decision days, central banks now have a larger relevant information set than investors. While macro data is equally available for central banks and market participants, central banks have better visibility into micro bank side data, which matters most currently.

As a result, there are several risks around today’s ECB meeting depending on the combination of the decision and President Lagarde’s tone in the press conference. With a set of major central bank meetings next week, today’s market reaction could hint at how investors will read central banks in this new set-up.

FOREX

If European funding conditions continue to tighten, a weaker euro will result via a more dovish ECB reaction function and, in these circumstances, create a natural demand for safe-haven dollars.

Even if ECB hiked in an environment of heightened stress, the euro would likely tank, given that rate hikes are currently the market's plague.

OIL

Oil is unlikely to slide to the $ 60s unless a 2008 ‘s style bank run unfolds. But after this week’s chunky liquidation Brent is having trouble getting into mojo mode in a recessionary-tinged environment, especially with an excess crude surplus in the pipelines.

Oil has stayed bid, however, after Goldman Sachs ( NYSE:GS)upped their GDP call on China, and property prices frequently rose in China. But tops side ambitions have possibly been thwarted by GS’s downside re-rating of the US GDP primary due to an upward trend in the bank-based cost of financing which adds an extra layer of tightening hitting the real economy.

In any case, the trouble in Main Street bank will directly impact bank lending conditions to the real economy amplifying the growth drag already underway. But the full macroeconomic impact of a pullback in lending by smaller banks will remain highly uncertain until the extent of the stress becomes clear.