US: Disruptive impulses - BBH

Analysts at BBH suggest that the disruptive impulses emanating from the United States are challenging for investors and officials as some observers are linking the US stock market slide to a kind of “buy the rumor, sell the fact” type of activity after following the passage of the tax cuts.  

Key Quotes

“The new slide in US tech stocks come as the US President attacks one by name on twitter.  The Reserve Bank of Australia left rates on hold today, as widely expected, but linked the increase in equity market volatility to US trade policy, and noted that the rise in LIBOR, in excess of Fed policy, was impacting Australia.”

“It seems like the standard interpretation for the rise of LIBOR is the surge in US bill supply following the lifting of the debt ceiling.  If we treat that interpretation as a hypothesis, we may be able to test it in the coming weeks.  First, with today's bill auction, US supply is being reduced.  The three- and six-month bill auctions are each being reduced by $3 bln, and the four-week bill auction will be cut by $10 bln.  As the tax deadline draws near (April 15), the Treasury's cash holdings will rise, reducing the need for bills.  It is currently yielding near 59 bp.  We have been persuaded that in addition to the bill auction, tax changes (not only encouraging repatriation but also changing the dynamics of intra-firm lending) are also playing an important role.”

“Today is also the first day that the Federal Reserve will begin publishing its alternative to LIBOR.  It is called the Secured Overnight Financing Rate (SOFR).  The volume that underpins it regularly exceeded $700 bln a day compared with $500 mln in three-month LIBOR.”