The highlight of the data this week is the U.S. employment report for September, but the indicator is unlikely to capture fully the scale of the shocks to the labor market, broader economy and consumer confidence of the events of the past two weeks.
Interbank money markets are experiencing historically high tensions after the collapse of Lehman Brothers and Washington Mutual, and the fire sale of Merrill Lynch and HBOS, while a global ban on short-selling has caused trading volumes in major stock exchanges to dwindle.
The liquidity crisis is spreading to the Gulf and other emerging markets. Meanwhile, the U.S. commercial paper market, a vital source of funding for many companies’ daily operations, has shrunk to its smallest level in almost two years.
All that has backed a stampede into safe-haven U.S. government debt that has sent short-term yields to near zero as prices rocketed.
“It’s the most dysfunctional market I can remember in my career of 20 years,” said Chris Iggo, chief investment officer at AXA Investment Managers. “It is the complete questioning of the very fundamentals of how the financial system works. The real key to everything we do is a matter of trust and there is evaporation of trust.”
“That’s why banks are not lending to each other and people are worried about the creditworthiness of debt and there’s a lack of belief in the ability of equities to deliver the earnings that analysts are forecasting.”
On Friday, the cost of borrowing dollars for three months in the interbank market stood at 3.76188 percent, a full two percentage points above expected official U.S. interest rates – a record premium.
Read more here: Tensions run high as investors face shocks